There are four types of bond interest rates: Coupon Rate, Current Yield, Yield to Maturity (YTM), and Yield to Call (YTC).

The yield to maturity (YTM) is an annualized rate of return calculated considering the purchase price of the bond, the future interest to be received, and the principal to be recovered at maturity. It's also known as the bond's maturity yield. Thus, when discussing the yield of a bond investment, it generally refers to the YTM.

Tip:

When buying bonds, only the "Yield to Maturity" is important. Other figures are not meaningful in investment and are often just part of sales pitches.

For example:

Each bond priced at 100 USD with a coupon rate of 5% is purchased at 102 USD each bond and held for 5 years. After that, the investor recovers the principal of 100 USD. The calculated yield in this case is 4.54%. In this example, the return for the investor is not the coupon rate of 5%, but the yield to maturity of 4.54%.

Many times you might hear about bonds being sold by banks with coupon rates of 6% to 8%, but the actual yield to maturity of these bonds may be far lower than 6% to 8%.