Bond coupon, current yield and yield to maturity: a cash-flow worksheet

Start with the promised cash, not the displayed percentage

A bond can have a 5% coupon, a current yield above 5%, and a still higher yield to maturity without any of those figures being a mistake. Each percentage answers a different question. The coupon describes interest relative to face value. Current yield relates annual coupon cash to today's purchase price. Yield to maturity incorporates the timing of the promised coupon and principal payments.

For a stock researcher reading a company's debt disclosures, this distinction also prevents a category error: a secondary-market buyer's yield is not automatically the coupon the issuer pays on existing fixed-rate debt. Start by identifying whose cash flow you are measuring. This tutorial builds a hypothetical investor worksheet, then shows what it can and cannot tell you about corporate financing.

Specify one simple bond completely

Assume a fictional, noncallable fixed-rate bond has $1,000 face value, exactly two years remaining, and a 5% annual coupon paid once a year. Purchase occurs immediately after a coupon date, with the next payment exactly one year away. Assume all promised payments arrive on time. There are no fees, taxes, accrued interest at purchase or foreign-exchange effects in the example.

These assumptions are deliberately simplified, not a description of a particular security. The SEC's corporate-bond bulletin distinguishes fixed-rate, floating-rate and zero-coupon instruments. Our calculation covers only the stated fixed-rate schedule. A different contract requires a different cash-flow model.

Write the schedule before using a yield formula: at purchase, pay the price; after one year, receive $50; after two years, receive $1,050, consisting of the final $50 coupon and $1,000 principal. The final coupon must appear once. Adding a separate $50 after already entering $1,050 would overstate the amount received.

Calculate coupon rate and current yield

The annual coupon is $1,000 multiplied by 5%, or $50. That payment is tied to face value under our assumed contract. Paying a discount for the bond does not increase the promised $50 coupon; paying a premium does not reduce it. The purchase price changes the buyer's return calculation.

For this example, use a calculated purchase price of approximately $913.2231405, displayed as $913.22. Current yield is $50 divided by the unrounded price, approximately 5.4751%. Keep the full precision in your spreadsheet and round only the displayed outputs. Small rounding differences should not be mistaken for economic differences.

Current yield captures the annual coupon relative to that purchase price, but omits the separate effect of receiving $1,000 principal after paying less than $1,000. It also does not assign a time value to each future payment. Those omissions explain why it cannot substitute for yield to maturity in this two-year example.

As a quick diagnostic, imagine paying $1,000 instead. The same $50 coupon then produces 5% current yield. At a hypothetical $1,100 purchase price it produces about 4.5455%. The contractual coupon rate remains 5% in all three cases. Label the denominator on every row so the changing percentages do not look like changing interest payments.

Solve the present-value equation

FINRA defines yield to maturity mathematically as the discount rate that makes the present value of the promised cash flows equal the bond's price. For our annual-payment example, let y be that annual rate. The equation is: price = $50 / (1 + y) + $1,050 / (1 + y)².

Substitute y = 10%. The first payment has a present value of approximately $45.4545455. The final payment has a present value of approximately $867.7685950. Their sum is approximately $913.2231405, matching the calculated purchase price before rounding to cents. The yield to maturity is therefore 10% under this assumed schedule.

The three outputs now fit together: 5% coupon rate, approximately 5.4751% current yield, and 10% yield to maturity. The last measure includes both coupons and the discount between the purchase price and the promised principal repayment. It is not calculated by simply adding the discount percentage to the coupon rate.

To reproduce the result in a spreadsheet, create three annual cash-flow cells: negative $913.2231405, positive $50, and positive $1,050. An internal-rate-of-return calculation for those equally spaced annual periods should give approximately 10%. Verify it by putting the result back into the present-value equation. This second check catches a wrong sign, omitted payment or duplicated principal amount.

Distinguish an internal rate from terminal wealth

The 10% internal rate describes the dated cash-flow stream. Calculating it does not require you to actually reinvest the first coupon. But a different question—how much accumulated wealth you have after two years—does depend on what happens to that coupon after receipt.

Suppose the first $50 coupon is reinvested for one year at 10%. It grows to $55. Add the final $1,050 bond payment and terminal wealth equals $1,105. This agrees with the unrounded purchase price multiplied by 1.10 squared. In this particular scenario, the compound growth of terminal wealth matches the quoted annual yield.

Now suppose the first coupon sits in cash earning nothing. Terminal wealth is $50 plus $1,050, or $1,100. Relative to the original price, its two-year compound annual growth rate is approximately 9.7508%, calculated as (1,100 / purchase price)^(1/2) minus one. The bond's original dated-payment internal rate remains 10%; the accumulated-wealth calculation answers another question.

Do not hide that distinction by calling every percentage “annual return.” Name the method, the measurement dates and the treatment of interim cash. If coupons are spent, your ending account balance will omit that consumption even though you received the payments. A complete record should preserve both the bond proceeds and what happened to cash outside the position.

Test a sale before maturity

Holding to maturity is an assumption in the quoted yield, not a commitment imposed by the worksheet. Suppose you instead collect the first $50 coupon and immediately sell the bond for a hypothetical $900 after one year. Your proceeds total $950. Against the original unrounded price, the one-year holding-period return is approximately 4.0271%, before the excluded costs and taxes.

The original 10% yield to maturity did not promise a 10% return for this early-sale scenario. The $900 sale price is an invented outcome, not a forecast. It demonstrates why a plan to sell early requires attention to the possible sale price, not just the yield quoted at purchase.

The SEC's interest-rate bulletin explains the inverse relationship between fixed-rate bond prices and market yields, holding other relevant features constant. Test that relationship on the original two-year schedule: discounting its payments at 5% gives a $1,000 price, while discounting them at 15% gives approximately $837.43. Those are same-date valuation scenarios, not consecutive observations. Do not mix a shorter remaining maturity into the comparison without updating the schedule.

Add the contract and credit checks

The SEC's corporate-bond discussion identifies default risk and provisions allowing some issuers to redeem bonds early. A promised cash-flow schedule is not proof that the issuer can meet it. And a maturity-based calculation may not describe the actual cash flows if a contractual call changes the payment date and amount.

Before using this worksheet for a real bond, replace the fictional schedule with its documented payment dates, principal terms and any applicable redemption provisions. Record the price timestamp and the amount actually payable at settlement. Match payment frequency and the calculator's rate convention; our once-a-year exercise should not be copied unchanged into a semiannual quote.

Keep uncertain inputs visible. If you have not verified a call schedule, do not silently assume the security is noncallable. If the issuer's payment capacity is the research question, investigate that separately rather than treating a high quoted yield as evidence of safety. A more attractive percentage can coexist with a less reliable cash-flow promise.

Use the result in a company research memo

For an equity memo, retain separate columns for the existing debt's coupon, its outstanding principal, its maturity, and any observed market yield with a date and source. The investor's discount-price gain in our example is not an extra coupon paid by the fictional issuer. Our principal repayment remains $1,000 under the assumed contract.

A market yield can inform a question about future financing conditions, but it is not itself a verified rate for a new borrowing. The terms of an actual refinancing would need their own evidence. Do not multiply a quoted yield by all outstanding debt and label the result next year's interest expense without checking the contracts and the refinancing assumptions.

Finish the worksheet with the cash-flow schedule, all three named yield measures, the reinvestment scenario and the early-sale sensitivity. Another reader should be able to rebuild the numbers from those inputs. That reproducibility is the useful output: it separates contractual payments, the buyer's price and conditional future outcomes before they become an investment conclusion.