If you’re thinking about including bonds in your investment plan, you’re not alone. Many investors choose bonds because they’re known for offering steady returns with less risk than stocks. Simply put, a bond is like an agreement between you and whoever is issuing the bond—it could be the government, a company, or a public institution. You lend them money for a set period of time, and in return, they agree to pay you regular interest and give back your original amount (called the principal) when the bond matures. Bonds are a great option for people who want predictable income and want to keep their investment safe. Investing through a reliable platform makes the whole process even easier and more secure.
What is Maturity Value in Bonds?
When you invest in a bond, you’re lending your money for a specific time. You get your original investment back at the end of that period—the maturity value. For example, if you buy a bond with a face value of ₹1,000 and hold it until maturity, you’ll get ₹1,000 back at maturity.
Now, if you invest in a zero-coupon bond, things work differently. These don’t pay interest during the bond’s life. Instead, you buy them at a discount and get the full value at maturity. The difference between the buying price and maturity value is your return.
To figure out how much you’ll get back, you can use this simple formula:
V = P × (1 + r)ⁿ
Where:
V = Maturity value (the amount you’ll get at the end)
P = The original amount you invested (principal)
r = Interest rate for each compounding period
n = Number of compounding periods until maturity
On the other hand, coupon bonds work more traditionally. These pay you regular interest (called coupons) during the bond’s life and return the face value at the end. These are ideal for investors seeking consistent income, like a business that needs regular cash flow.
What is Bond Yield & Why It Matters?
Yield shows how much you earn from a bond each year. Among the different types of yield, Yield to Maturity (YTM) is the most comprehensive.
YTM tells you your total return if you hold the bond until it matures. It accounts for annual interest as well as any profit or loss from buying the bond above or below face value.
Here’s the formula:
YTM = [ C + (FV – PV) ÷ t ] ÷ [ (FV + PV) ÷ 2 ]
Where:
C = Annual coupon payment
FV = Face value
PV = Purchase price
t = Years until maturity
Suppose you buy a bond for ₹950 with a ₹50 yearly coupon and ₹1,000 face value, maturing in 5 years. Your YTM is around 6.15%, higher than the 5% coupon rate, because you bought it at a discount.
YTM is like a full report card for your bond. It shows the actual annual return, helping you compare bonds with different prices, interest rates, and maturities equally.
Current Yield vs Yield to Maturity (YTM): What’s Better?
Both are useful, depending on what you’re looking for.
- Current Yield: This is the “income right now” number. It’s calculated by dividing the annual coupon by the bond’s purchase price. If your goal is steady yearly income, like a business monitoring annual profits, current yield gives a quick answer.
- YTM: This gives the “total return over time” and includes all income, gains, or losses, plus how long you hold the bond. If you plan to hold the bond until maturity, YTM is a better metric.
In short:
- For regular income = Use the current yield
- For total return = Use YTM
Most investors rely on YTM for decision-making, as it provides a detailed view of their actual earnings.
Importance of Current Yield for Bond Investors
Current yield helps you understand how much income you’ll earn this year based on your investment. For example, if a bond pays ₹6,000 annually and you bought it for ₹1,00,000, your current yield is 6%.
It’s especially useful when comparing bonds on a platform. Say you’re choosing between two bonds—one offering a higher coupon but priced higher, and another with a lower coupon but cheaper. Current yield shows which one gives better annual returns for your money.
However, current yield doesn’t factor in the bond’s maturity value or gains/losses. It only focuses on income, not the full picture.
What Makes Yield to Maturity (YTM) Crucial?
YTM is considered the best measure when evaluating bonds. Here’s why:
- Comprehensive: It includes all future cash flows—both coupon payments and principal.
- True Return: It accounts for whether you bought the bond at a discount or a premium.
- Long-Term Focused: It’s ideal for investors planning for retirement or long-term goals.
- Assumptions: It assumes coupon payments are reinvested at the same rate, which may not always happen, but it’s still a solid estimate.
YTM is like a business planning for the long term—it looks beyond today’s returns and evaluates how the whole investment plays out over time.
When to Use Current Yield in Bond Investing?
Let’s say you’re evaluating several bonds on a bond investment platform. If your main goal is to maximise annual income, current yield helps you compare options quickly. For instance, if you’re deciding between two bonds—one with a higher coupon but a higher price, and another with a lower coupon but a lower price—current yield reveals which one gives you more income for your investment today.
This is especially relevant for investors who want predictable annual income and may not plan to hold the bond until maturity, similar to a business that values steady yearly profits over long-term gains.
When to Use Yield to Maturity (YTM)?
Now, suppose you’re building a long-term investment strategy. YTM becomes your go-to metric. It helps you compare bonds fairly, regardless of their purchase price or maturity. For example, if you buy a bond at a discount, your YTM will be higher than the coupon rate, reflecting the extra gain at maturity. Conversely, buying at a premium lowers your YTM.
YTM is particularly useful for retirement planning, portfolio forecasting, and comparing bonds to other investments like fixed deposits or stocks. It gives you a clear sense of your expected annual return if you hold the bond to maturity, much like a business forecasting the total return from a long-term project.
Summary: Maturity vs Yield in Bond Investing
Bonds play a crucial role in building a balanced investment portfolio.. Whether you’re seeking steady income, long-term growth, or a way to diversify your holdings, understanding maturity value and yield is key to making smart decisions. Current yield gives you a snapshot of your annual income, while YTM offers a comprehensive view of your total return.
When you use a trusted bond investment platform, you gain access to a wide range of bonds, transparent yield comparisons, and user-friendly tools to calculate maturity values and yields. This makes it easier to build a portfolio that matches your financial goals and risk appetite.
Final Thoughts on Bond Returns and Investment Strategy
Bonds offer a smart mix of safety, steady income, and flexibility. By understanding how maturity, value and yield work, you’re in a better position to grow your wealth wisely and confidently.Ready to start? Try a trusted SEBI-regulated platform like Bondbazaar—with zero brokerage, no account maintenance fees, and easy access to a wide selection of bonds
Also Read: Mutual funds vs. direct stock investing: Which one is better for wealth creation?
