Bond Coupon vs Yield to Maturity: What You Actually Earn

A bond's coupon is the fixed interest it pays on its face value; its yield to maturity (YTM) is the annual return you actually earn if you buy at today's market price and hold until maturity. The two are equal only when you buy at face value. Buy below face value and your YTM is higher than the coupon; buy above it and your YTM is lower. When comparing bonds with each other or with fixed deposits, YTM is the number that matters.

The four numbers on a bond

A fourth measure, current yield, sits between coupon and YTM:

Current yield = annual coupon ÷ market price

It captures the income relative to what you pay but ignores the gain or loss as the price converges to face value at maturity. YTM includes both.

Worked example: same bond, three prices (illustrative)

A bond has face value ₹1,000, an 8% annual coupon (₹80 a year) and three years to maturity. Assume annual coupons, no default and reinvestment at the same yield. All prices are illustrative.

How YTM is found

YTM is the single discount rate y that makes the present value of all future payments equal the price. For the ₹970 bond:

₹970 = 80 ÷ (1 + y) + 80 ÷ (1 + y)² + 1,080 ÷ (1 + y)³

Solving gives y ≈ 9.19%. There is no simple closed formula; spreadsheets use the RATE or YIELD function, and bond platforms show YTM directly.

Why the discount bond earns more

Buy at ₹970 and over three years you receive:

• Coupons: 3 × ₹80 = ₹240
• Principal: ₹1,000, which is ₹30 more than you paid
• Total cash received: ₹1,240 on ₹970 invested

That extra ₹30 of "pull to par" is why YTM (9.19%) is above the 8% coupon. The premium bond works in reverse: you pay ₹1,030 but get back only ₹1,000, a ₹30 loss that drags YTM down to 6.86% even though you still collect ₹80 a year.

Price and yield move in opposite directions

The coupon is fixed, so when market yields change, the price adjusts. Here is the same 8% bond, and a 10-year version, priced at different market yields:

A 1-point rise in yields cut the 3-year bond's price by 2.53% (₹1,000 → ₹974.69) and the 10-year bond's by 6.42% (₹1,000 → ₹935.82). Longer bonds swing more. This is duration risk, the same force that moves debt fund NAVs; see debt fund duration risk vs credit risk.

If you hold to maturity and the issuer pays, these interim price swings do not change your final rupee outcome. They matter if you need to sell early.

What YTM assumes, and when it misleads

1. You hold to maturity. Selling early means your return depends on the price at that time.
2. No default. A high YTM often reflects higher credit risk. A corporate bond yielding several points above a government bond of the same maturity is paying you to accept that risk. Check the rating from CRISIL, ICRA, CARE or India Ratings, and remember ratings can be cut.
3. Coupons are reinvested at the YTM. If rates fall, reinvested coupons earn less and the realised return is lower.
4. No call option. A callable bond can be repaid early by the issuer, usually when rates fall. For these, look at yield to call and the lower of the two, often called yield to worst.
5. Before tax. YTM is a pre-tax figure; your after-tax yield depends on your slab.

Clean price, dirty price and accrued interest

Bond prices are usually quoted "clean", excluding interest that has built up since the last coupon. When you buy, you pay the dirty price: clean price plus accrued interest, which you get back at the next coupon.

Illustration: a ₹1,000 bond with an 8% coupon paid half-yearly (₹40 each half) is bought 90 days after the last coupon. Using a 360-day year convention, accrued interest = ₹1,000 × 8% × 90 ÷ 360 = ₹20. At a clean price of ₹990 you pay ₹1,010.

Coupon vs YTM when comparing with an FD

An FD's quoted rate is close to a YTM: you invest at par and get a known return if held to maturity. A bond's coupon is not. To compare fairly, use the bond's YTM against the FD rate for a similar term, then adjust for differences in risk, liquidity and tax treatment. Run the FD side with the FD calculator. Bank deposits carry DICGC insurance up to ₹5 lakh per depositor per bank as of October 2026; corporate bonds carry no such cover. Short-term government options such as T-bills are covered in treasury bills vs fixed deposits.

Where Indians buy bonds

• RBI Retail Direct: individuals can open a gilt account with RBI to buy government securities, treasury bills and state development loans directly.
• Stock exchanges: listed government and corporate bonds trade on NSE and BSE through a demat account.
• SEBI-registered online bond platform providers (OBPPs): apps that sell listed bonds to retail investors, often in smaller ticket sizes than before, with face values as low as ₹10,000 for many corporate bonds.
• Debt mutual funds and target maturity funds: professional management and diversification, with YTM shown on the factsheet.

Be wary of platforms or messages promising "guaranteed" double-digit yields on unrated or unlisted debt. See how to spot investment scams.

How bond returns are taxed in 2026

As of October 2026, under the Income-tax Act, 2025:

Illustration: in the 30% slab (31.2% with cess), the ₹970 bond's ₹80 coupon leaves ₹80 × (1 − 0.312) = ₹55.04 after tax each year. If it is listed and held over 12 months, the ₹30 gain at maturity is taxed at 12.5% plus cess, ₹30 × 13% = ₹3.90. The after-tax return is therefore much lower than the 9.19% pre-tax YTM. For how bonds fit beside equity and gold, see stocks vs bonds vs gold.

This article is educational and not a recommendation to buy any bond.

Key takeaways

• Coupon is fixed interest on face value; YTM is the annual return from today's price to maturity.
• In the illustration, an 8% coupon bond bought at ₹970 had a 9.19% YTM; at ₹1,030 it was 6.86%.
• Prices and yields move inversely, and longer bonds move more: a 1-point rise cut a 10-year bond's price by 6.42%.
• YTM assumes no default, holding to maturity and reinvestment at the same rate; it is not guaranteed.
• As of October 2026, coupons are taxed at slab rates and listed-bond gains after 12 months at 12.5%.