Current yield and yield to maturity are two important metrics used to assess the return on investment for bonds. Current yield represents the annual interest income generated by a bond relative to its current market price. It is calculated by dividing the bond’s annual interest payment by its current market price. For example, if a bond has a face value of Rs. 1000, pays an annual interest of Rs. 50, and is currently trading at Rs. 950, its current yield would be 5.26%.
On the other hand, yield to maturity (YTM) reflects the total return an investor can expect if they hold the bond until maturity, accounting for factors like coupon payments and any capital gains or losses. YTM considers both the coupon income and the difference between the purchase price and the face value of the bond. For instance, if the same bond mentioned earlier matures in 5 years and is purchased at Rs. 950, its YTM would be 6.32%, due to factors like time to maturity and purchase price.