Bonds may be priced higher or lower based on current interest rates; from this fluctuation arises bond trading. The current yield is the rate the investor receives based on the price actually paid for a bond, and is computed by multiplying the face value of the bond by the coupon rate and dividing by the purchase price. For example, a $1,000 face value bond with coupon rate of 10% and purchased at $800 has a current yield as follows:
current yield = = 9.41%
The yield to maturity (YTM) takes into account the years remaining to maturity, annual interest payments, and the capital gain (or loss) realized at maturity. It is much more useful in determining the value of a bond. It is obtained from special tables, though it can be approximated:
I = annual interest rate
B =, where M = the current market price of the bond and N = years to maturity
U.S. Treasury Bills (T-Bills) are U.S. government debt obligations issued by the Federal Reserve. Offered in denominations of $10,000 and up, they are issued in differing maturities, but all within one year. There are 3 month, 6 month, 9 month, and 1 year bills. The bonds are purchased at the face value less the interest that the bond offers. For example, a $10,000 face value 182 day T-bill with a 10% discount interest rate would cost the buyer at the time of purchase $9494.44 ($10,000 - $505.56).
Tax exempt bonds are issued by state and local governments and are free from federal income tax on interest payments, but capital gains are taxable. They are often issued in $5,000 denominations and pay interest semi-annually. Holders of out-of-state bonds, however, may have to pay income taxes on the interest as specified by the holder’s home state. For example, a Los Angeles resident holding Chicago municipal bonds would be subject to Los Angeles income taxes on interest from the bond.