Current yield and total return on a Hong Kong bond.
Current yield
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Annual coupon
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Yield to maturity
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Total return
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Your breakdown
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Coupon rate, current yield and yield to maturity are three different things
The coupon rate is fixed when the bond is issued and never changes. It is applied to the face value, so a 4 percent coupon on a $100,000 bond pays $4,000 a year regardless of what you paid. The current yield divides that same $4,000 by the price you actually paid, which is what tells you the income return on your money. Yield to maturity goes one step further and folds in the gain or loss you make if you hold to redemption, because a bond bought below face value pays back more than you put in, and one bought above face value pays back less. This tool reports all three so you can see where the return is coming from.
How the approximate yield to maturity is built
A precise yield to maturity needs the internal rate of return on every cash flow, which has no clean closed-form solution. This calculator uses the standard approximation: take the annual coupon, add the capital gain or loss spread evenly across the years to maturity, then divide by the average of the purchase price and the face value. It is close enough for comparing two bonds and is the method most retail platforms quote. For a bond trading right on the cliff edge of redemption, or with unusual payment dates, a full discounted cash flow will differ slightly.
A five-year bond bought at a small discount
Say you buy a $100,000 face-value bond for $98,000, it pays a 4 percent coupon, and it matures in five years. The annual coupon is $4,000. The numbers fall out like this:
The yield to maturity of 4.44 percent sits above the current yield of 4.08 percent precisely because you bought below par and collect the $2,000 difference at redemption. Buy a bond above par and the relationship flips, with yield to maturity falling below the current yield. The chart contrasts the two yield measures.
Why a Hong Kong investor keeps the lot
This is where Hong Kong is unusually kind to bondholders. There is no interest tax for an individual, so the coupons arrive untaxed. There is no capital gains tax either, so the $2,000 redemption gain is yours in full. Government retail bonds such as the iBond and Silver Bond have carried inflation-linked or stepped coupons in the past, and those payments were treated the same way. The figures here are pre-tax and post-tax at once for a personal investor, which is rarely true elsewhere. A company holding bonds as part of a trade is a different matter and may face profits tax, so confirm your own position with the Inland Revenue Department. The practical upshot is that you should compare a Hong Kong bond yield directly with a bank deposit rate or a dividend yield without any mental tax adjustment, because none of them is taxed in your hands. In a place with income tax on interest, you would have to gross the figures up first to compare fairly.
Hold to maturity or sell early
The two yield figures describe a buy-and-hold investor who collects every coupon and redeems at face value. If you sell before maturity, you get the market price on that day instead of the face value, and that price swings with interest rates. Rates rise and your bond is worth less than you paid; rates fall and you may bank a gain. Either way the realised return differs from the yield to maturity quoted at purchase. For a retail investor in a Hong Kong government bond, holding to maturity is the simplest path, because the redemption amount is known and the math in this tool then plays out as shown.
Why does a bond price move away from its face value?
Mostly because market interest rates change after issue. If new bonds pay more than your bond's fixed coupon, yours becomes less attractive and its price falls below par until the yield matches. If rates fall, your higher coupon is prized and the price rises above par. Credit risk and time to maturity also move the price.
Is yield to maturity guaranteed if I hold the bond?
It is the return you lock in only if the issuer pays every coupon and redeems at face value on schedule, and if you can reinvest coupons at the same rate. A default, an early call, or lower reinvestment rates will change the realised return. For a high-grade government bond held to maturity, the quoted yield is usually a fair guide.