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Understanding Yields

There are two types of bond yields you should know about: 1) current yield and 2) 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 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.

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