Financial Blog

The Coupon Rate is the amount that you, as an investor, can expect as income as you hold the bond. The Coupon Rate for each bond is fixed upon issuance. Here’s a sample computation for a Retail Treasury Bond issued by the Bureau of Treasury:

The Yield to Maturity is a rate of return that assumes that the buyer of the bond will hold the security until its maturity date and incorporates the rise or fall of market interest rates. This will be a bit technical. Let’s see what happens to your bond when interest rates in the market move.

When bonds are initially issued in the primary market, the Coupon Rate is based on current market rates, hence YTM is equal to the Coupon Rate. In the example bond above, when you bought the 3-year RTB issued at the primary market, your YTM and Coupon Rate is 2.375%. Now, what if you bought the security in the secondary market? The resulting YTM will differ from the Coupon Rate. This is simply because interest rates change daily. To prove this point, say a month later you decide to purchase the same RTB 03-11 in the secondary market. However, Interest rates increased. From 2.375%, quoted yield increased to 2.700%. Let’s see how much you’d have to pay for the same security you bought a month ago:

So now we have a better understanding of why brokers quote the bonds in terms of Yield to Maturity. Again, this is because the YTM reflects the current market rates and the value of your bond. If you want to know how your bonds fair in the market, check out the relevant yield for the tenor of the bond you are holding using our Securities Calculator.