What Are Bond Yields? Coupon, Current Yield and Yield to Maturity Explained
Quick answer
A bond yield is the return an investor earns on a bond, expressed as a percentage. The coupon yield is the fixed payment as a share of face value; the running yield divides the coupon by the current price; and the yield to maturity is the total return if the bond is held to redemption.
Bond yield measures compared
| Yield measure | What it means | Simple example (illustrative) |
|---|---|---|
| Coupon (nominal) yield | The fixed annual coupon as a percentage of the bond face value (nominal value). It never changes once the bond is issued. | A GBP 100 bond paying a GBP 5 coupon each year has a 5% coupon yield. |
| Running / current yield | The annual coupon divided by the current market price. It moves as the price moves, so it reflects what a new buyer earns on income today. | If that same GBP 5 coupon bond trades at GBP 80, the running yield is 5 / 80 = 6.25%. |
| Yield to maturity (redemption yield) | The total annual return if you buy at the current price and hold to maturity, counting both the coupons and any gain or loss versus the GBP 100 returned at redemption. | Buying at GBP 80 a bond that repays GBP 100 at maturity adds a capital gain on top of the coupons, so the yield to maturity is higher than the 6.25% running yield. |
| Price and yield move inversely | For a fixed set of cash flows, paying a higher price lowers the return, so when the price rises the yield falls, and when the price falls the yield rises. | The GBP 5 coupon is fixed, so a price of GBP 100 gives 5% while a lower price of GBP 80 gives 6.25%. |
A bond yield measures the return you earn on a bond, but the word covers several different figures, and confusing them is one of the most common bond mistakes. The coupon yield is fixed at issue and tells you the interest paid as a share of the bond face value. The running yield adjusts that for the price you actually pay today, and the yield to maturity (the redemption yield) folds in the capital gain or loss you lock in by holding the bond to the end. The table above sets each one against a simple illustrative example.
The figures in those examples are illustrative, not live market rates. The key idea they show is real, though: because a bond pays a fixed stream of cash, the price you pay determines your return. The UK Debt Management Office puts it plainly for gilts, noting that as prices rise the investor is paying more for the same fixed cash flows and so the yield falls, and that the redemption yield is the return from buying at the price shown and holding to maturity. That is why bond prices and yields move in opposite directions.
For the wider picture on UK government and savings bonds, start with our pillar guide to UK bonds explained: gilts and premium bonds. To see how yields feed into portfolio decisions, read why bonds are used to de-risk a portfolio, and for the policy rate that anchors short-term yields, see the Bank of England base rate explained.
Frequently asked questions
What is yield to maturity?
Yield to maturity, also called the redemption yield, is the total annual return an investor earns if they buy a bond at its current price and hold it until it matures. It counts both the coupon payments and any difference between the purchase price and the amount repaid at maturity, so it is a fuller measure than the coupon or running yield.
Why do bond prices fall when yields rise?
A bond pays a fixed set of cash flows, so its yield depends on the price you pay for them. If you pay less, those fixed payments represent a larger return, so the yield rises. If you pay more, the same payments represent a smaller return, so the yield falls. Price and yield therefore move in opposite directions.
What is a gilt yield?
A gilt yield is the yield on a UK government bond (a gilt). The most quoted version is the redemption yield, which the UK Debt Management Office defines as the return an investor receives from buying the gilt at the price shown and holding it to maturity. Gilt yields change continuously as gilt prices move in the market.
What is a good bond yield?
There is no single good number. A bond yield only makes sense alongside its duration and its risk. A higher yield often reflects greater risk, such as a longer time to maturity or a less creditworthy issuer, rather than a better deal. Compare a yield against bonds of similar maturity and credit quality before judging it.
Sources
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General information, not financial advice. Tax rules and figures can change; check the current position on gov.uk before acting.