Understanding Yields

There are basically two types of bond yields you should know about: current yield and yield to maturity.

Current yield is the annual return on the dollar amount paid for a bond. Yield to maturity is the rate of return you receive by holding a bond until it matures. It equals the interest you receive from the time you purchase the bond until maturity.

Tax-exempt yields are usually stated in terms of yield to maturity, with yield expressed at an annual rate. If you purchase a bond with a 6% coupon at par, its yield to maturity is 6%. If you pay more than par, the yield to maturity will be lower than the coupon rate. If purchased below par, the bond will have a yield to maturity higher than the coupon rate.

When the price of a tax-exempt security – or any bond, for that matter – increases above its par value, it is said to be selling at a premium. When the security sells below par value, it is said to be selling at a discount.

Revised 1/3/2012