Every bond listing shows a “Yield to Maturity” or “YTM” figure prominently. It's the single most important number in fixed income, and arguably the most commonly misread. Here's what it actually measures.
Coupon rate vs. yield
The coupon rate is the fixed interest that the issuer promises on the bond's face value. A INR 1,000 bond with an 8% coupon pays INR 80 a year, unconditionally, until maturity. Yield to Maturity is different: it's your actual annualised return, factoring in the coupon, the price you paid, and the principal returned at maturity. In simple terms, it is the bond's overall annualised return if you hold it until maturity. If you buy at issuance, at face value, the YTM equals the coupon rate. Buy later, at a different price on the exchange, and the YTM can be higher or lower than the coupon rate.
Two worked examples
Example 1: A bond is issued at INR 100 with a 10% coupon and a 5-year tenure. If you buy it at issuance and hold until maturity, you earn exactly 10% a year. In this case, the coupon rate and YTM are identical.
Example 2: The same bond, two years later, is trading on the exchange at INR 90 instead of INR 100, perhaps because interest rates have risen since issuance. You buy at INR 90 with 3 years left before maturity. Over those 3 years you collect INR 10 × 3 = INR 30 in interest, and at maturity you receive the full INR 100 face value, creating a INR 10 capital gain over your INR 90 purchase price. Your total return is therefore INR 40 on a INR 90 investment over three years, resulting in an annualised yield of roughly 14.3%, well above the 10% coupon rate, simply because you bought the bond at a discount.
The key principle to remember is that bond prices and yields move in opposite directions. When a bond's price falls, its yield rises because you're paying less for the same future cash flows. When a bond's price rises, its yield falls.
Why your account shows less than the quoted yield
A stated 10% yield might break down as 8% interest and 2% capital gain. Only the interest portion arrives periodically in your bank account; the capital-gain portion is realised at maturity, when the price convergence plays out. On top of that, 10% TDS is deducted from interest before it reaches you, which is fully creditable against your tax return, while capital gains attract zero TDS. So INR 8 of stated interest becomes INR 7.2 in hand; the eventual capital gain arrives untouched by TDS, though taxable separately.
Why “zero volatility” still applies here
Once you buy a bond and plan to hold to maturity, your expected return is largely insulated from day-to-day market price fluctuations. The bond's quoted price can still fluctuate on the exchange, but that's irrelevant to you unless you intend to sell early. This is one of the most underrated features of direct bond ownership: you can genuinely ignore day-to-day price movements if your plan hasn't changed.
One caveat: yield alone isn't the whole story
A high yield paired with a weaker credit rating usually means you're being compensated for taking on more risk, not that you've discovered a hidden opportunity. When evaluating a bond, always consider the yield alongside the credit rating and tenure, rather than looking at any one of those factors in isolation.