NISM-Series-X-A: Investment Adviser (Level 1) · Investing in Fixed Income Securities

Bond Pricing and Yield Measures: Price, Current Yield and YTM

Q: How do I calculate bond price in the NISM exam?

Find each coupon and the face value repayment. Discount each one at the required yield for its period. Add the present values to get the price.

Q: What is the difference between current yield and yield to maturity?

Current yield is annual coupon divided by market price. It ignores the gain or loss at redemption. YTM includes coupons, redemption value and the time value of money, so it is a fuller measure of return if held to maturity.

Q: Why does bond price fall when yield rises?

New bonds offer higher coupons when market rates rise. Existing bonds with lower fixed coupons must trade at lower prices to give buyers the higher yield.

Q: What is yield to call?

Yield to call is the annual rate that equates the bond's price to the present value of its coupons up to the call date plus the call price. You use it when the issuer may redeem the bond before maturity.

Updated 11 October 2026 · Fact-checked

A bond's price is the present value of its future coupons and redemption amount, discounted at the market yield. Current yield is annual coupon ÷ market price. Yield to maturity is the discount rate that equates the price to all cash flows. Price and yield move in opposite directions.

Understand Bond Pricing and Yield Measures

A bond promises fixed cash flows: periodic coupons and the face value at maturity. Money received later is worth less than money received today. So the fair price of a bond is the present value of all these cash flows.

The discount rate you use is the required yield (market yield) for a bond of similar risk and maturity. If the required yield equals the coupon rate, the bond trades at par (price = face value). If the required yield is higher than the coupon rate, the price falls below face value: a discount. If it is lower, the price rises above face value: a premium.

This is why price and yield move in opposite directions. When market rates rise, existing bonds with lower coupons become less attractive, so their prices fall. When rates fall, prices rise.

There are three common yield measures. Current yield looks only at coupon income against today's price. Yield to maturity (YTM) is the single annual rate that makes the present value of all remaining cash flows equal to the price; it includes coupons and the gain or loss on redemption. Yield to call (YTC) is the same idea, but it assumes the issuer redeems the bond at the call date at the call price, not at maturity.

YTM assumes you hold to maturity, the issuer does not default, and coupons can be reinvested at the YTM itself. Real returns can differ if these do not hold.

Key formulas to remember

Bond price (annual coupons): P = C ÷ (1+y) + C ÷ (1+y)² + … + (C + F) ÷ (1+y)ⁿ; C = annual coupon, F = face value, y = required yield, n = years to maturity.
Bond price (semi-annual coupons): P = Σ [ (C÷2) ÷ (1 + y÷2)ᵗ ] + F ÷ (1 + y÷2)²ⁿ; Halve the coupon and yield, double the number of periods.
Coupon: C = Coupon rate × Face value; Coupon is computed on face value, not on market price.
Current yield: Current yield = Annual coupon ÷ Current market price × 100; Ignores capital gain or loss and time value of money.
YTM approximation: YTM ≈ [C + (F − P) ÷ n] ÷ [(F + P) ÷ 2]; Only an estimate. The exact YTM comes from trial and error or a calculator.
Price–yield and par/premium/discount rules: Coupon rate = YTM → Price = Face value; Coupon rate > YTM → Price > Face value; Coupon rate < YTM → Price < Face value; Relationship between price and yield is inverse.
Yield to call: Price = Σ coupons discounted + Call price ÷ (1+y)ᵗ; t = years to the call date. Solve for y.

How to solve Bond Pricing and Yield Measures questions

Use this method for any pricing or yield question. Decide first whether the question asks for price or for yield.

1Write down face value, coupon rate, market price (if given), years to maturity or call, and coupon frequency.
2Compute the coupon in rupees: coupon rate × face value. Halve it if payments are semi-annual.
3If asked for current yield, divide annual coupon by market price and stop.
4If asked for price, list each cash flow and discount it at the required yield for its period. Add the present values.
5If asked for YTM or YTC, use the relationship: price below face value means yield above coupon rate; price above face value means yield below coupon rate. Then test a rate or use the approximation.
6For a call, replace face value with the call price and maturity with the call date.
7Check the answer against the par, premium or discount rule. If it breaks the rule, recheck your work.

Quickest way: Direction check before calculation

When to use it: Use it when options are spread out or the question asks only about direction or ranking.

Compare coupon rate with yield. Coupon above yield means premium; below means discount; equal means par.
Eliminate options that break this rule.
For current yield, divide coupon in rupees by price directly.
For a one-year bond, price = (face value + coupon) ÷ (1 + y). Compute this quickly.
Remember the order for a discount bond: current yield is above the coupon rate, and YTM is above the current yield.

Common mistakes in Bond Pricing and Yield Measures

Calculating coupon on market price instead of face value.
Students see a price and use it as the base for everything.
Fix: Coupon = coupon rate × face value always. Use market price only as the denominator in current yield.
Treating current yield as YTM.
Both are called yields and both use the coupon.
Fix: Current yield ignores redemption gain or loss and time value. They are equal only when the bond sells at par.
Not adjusting for semi-annual coupons.
Students rush and discount at the annual rate.
Fix: Halve the coupon and the yield, and double the number of periods.
Saying price rises when yield rises.
Students confuse yield with coupon or with return on the bond.
Fix: Price and yield move inversely. Rising market yields mean falling prices.
Using maturity value for a called bond.
Students forget the call price and call date in YTC.
Fix: Use the call price as the final payment and the time to call as the horizon.
Using the YTM approximation as an exact figure.
The shortcut formula looks like a rule.
Fix: Treat it as an estimate. Pick the option closest to it and confirm direction with the par, premium or discount rule.

Worked examples

Example 1

A bond has face value ₹1,000, coupon rate 10% per annum paid annually, and 2 years to maturity. The required yield is 12%. Find its price.

Show the solution

Coupon = 10% × ₹1,000 = ₹100.
Year 1 cash flow ₹100, present value = 100 ÷ 1.12 = ₹89.29.
Year 2 cash flow = 100 + 1,000 = ₹1,100. Present value = 1,100 ÷ 1.2544 = ₹876.91.
Price = 89.29 + 876.91 = ₹966.20.
Check: coupon rate 10% is below yield 12%, so the price should be below ₹1,000. It is.

Answer: Price ≈ ₹966.20 (a discount to face value).

Example 2

A bond with face value ₹1,000 and 9% annual coupon trades at ₹900 with 5 years to maturity. Find the current yield and the approximate YTM.

Show the solution

Annual coupon = 9% × ₹1,000 = ₹90.
Current yield = 90 ÷ 900 × 100 = 10%.
Annual gain from redemption = (1,000 − 900) ÷ 5 = ₹20.
Average of face value and price = (1,000 + 900) ÷ 2 = ₹950.
YTM ≈ (90 + 20) ÷ 950 = 110 ÷ 950 = 11.58%.
Check: bond is at a discount, so YTM (11.58%) > current yield (10%) > coupon rate (9%). The order is correct.

Answer: Current yield = 10%; approximate YTM ≈ 11.58%.

Exam tips

Learn the order for a discount bond: coupon rate < current yield < YTM. For a premium bond, the order reverses.
Check whether the question gives annual or semi-annual coupons before you start.
Many questions test only the concept, such as what happens to price when yields rise. Answer these without calculation.
With negative marking of 25% of the question's marks on NISM X-A, skip a long numerical if you cannot set it up. A wrong guess on a 2-mark caselet question costs more.
In caselet questions, read the data once and note face value, coupon, price and years. Most errors come from using the wrong figure.

Practice questions from Investing in Fixed Income Securities

Bond Pricing and Yield Measures in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Bond Pricing and Yield Measures: frequently asked questions

How do I calculate bond price in the NISM exam?

Find each coupon and the face value repayment. Discount each one at the required yield for its period. Add the present values to get the price.

What is the difference between current yield and yield to maturity?

Current yield is annual coupon divided by market price. It ignores the gain or loss at redemption. YTM includes coupons, redemption value and the time value of money, so it is a fuller measure of return if held to maturity.

Why does bond price fall when yield rises?

New bonds offer higher coupons when market rates rise. Existing bonds with lower fixed coupons must trade at lower prices to give buyers the higher yield.

What is yield to call?

Yield to call is the annual rate that equates the bond's price to the present value of its coupons up to the call date plus the call price. You use it when the issuer may redeem the bond before maturity.