Yield to maturity (YTM) is the total annualised return of a bond purchased at the current market price and held until maturity, assuming coupon reinvestment at the same rate. It is the internal rate of return (IRR) of all the bond’s cash flows: periodic coupon payments plus the face value returned at maturity.
YTM Formula and Approximation
The exact YTM is the discount rate r that satisfies:
Price = Σ(Coupon / (1+r)t) for t = 1 to n, + (Face Value / (1+r)n)
This requires iterative solution. A widely used approximation:
YTM ≈ (Annual Coupon + (Face Value − Price) / Years) / ((Face Value + Price) / 2)
Example: A bond with $1,000 face value, 4% coupon ($40/year), 6 years to maturity, currently priced at $950. YTM ≈ (40 + (1000-950)/6) / ((1000+950)/2) = (40 + 8.33) / 975 = 4.96%.
Price-Yield Relationship
Bond price and yield move inversely. This is not a market convention but a mathematical consequence of discounting fixed future cash flows. As the discount rate (yield) rises, the present value of the cash flows falls. The relationship is convex: price falls less than proportionally as yields rise, and rises more than proportionally as yields fall.
| Bond Trade Price | YTM vs. Coupon Rate | Capital Gain/Loss at Maturity |
|---|---|---|
| Below par (discount) | YTM > coupon rate | Capital gain |
| At par | YTM = coupon rate | None |
| Above par (premium) | YTM < coupon rate | Capital loss |
Government of Canada Bond Benchmarks (Early 2026)
The Bank of Canada publishes daily Government of Canada benchmark bond yields. These serve as the risk-free reference rate for Canadian fixed income markets:
- 2-year GoC: approximately 2.8% to 3.2%
- 5-year GoC: approximately 3.1% to 3.4%
- 10-year GoC: approximately 3.3% to 3.6%
- 30-year GoC: approximately 3.5% to 3.8%
These yields change daily with monetary policy expectations and global bond market conditions.
Tax Treatment of Canadian Bond Income
Coupon interest from Canadian bonds is fully taxable as interest income in the year received or accrued under ITA s.12(1)(c). There is no preferential rate for bond interest; it is taxed at the investor’s full marginal rate. By contrast, eligible dividends from taxable Canadian corporations are grossed up and offset by the dividend tax credit; capital gains are included at 50% (for gains under the $250,000 individual threshold under current rules).
Strip bonds (zero-coupon Government of Canada bonds) have no cash interest payment but accrued interest is deemed to be received annually under ITA s.12(9) and s.16(1). Holding strip bonds in a TFSA or RRSP eliminates this annual tax cost.
Duration and Interest Rate Risk
Macaulay duration measures average time to cash flow receipt. Modified duration approximates price sensitivity: %change in price ≈ −modified duration × %change in yield. A bond with modified duration of 8 will lose approximately 8% of its price if yields rise by 1 percentage point. Long-duration bonds (10- to 30-year government bonds) carry more interest rate risk than short-duration bonds or T-bills.
Source
Bank of Canada daily bond yield series; ITA s.12(1)(c) (interest income), s.12(9) (strip bond accrual), s.16(1) (blended payments); Canadian Fixed Income Forum (CFIF) market conventions.
Frequently asked questions
- What is yield to maturity (YTM) on a bond?
- Yield to maturity is the total annualised return an investor would earn by purchasing a bond at the current price and holding it until maturity, assuming all coupon payments are reinvested at the same rate. YTM accounts for the coupon payments, the difference between the purchase price and face value (discount or premium), and the time to maturity. It is the internal rate of return (IRR) of the bond's cash flows.
- How is bond YTM calculated in Canada?
- The exact YTM is the rate r that satisfies: Price = sum of (coupon / (1+r)^t) for t=1 to n, plus (face value / (1+r)^n). Because this requires solving for r iteratively, an approximation is: YTM ≈ (annual coupon + (face value - price) / years to maturity) / ((face value + price) / 2). For Canadian government bonds, the Bank of Canada publishes daily YTM data on its website.
- What is the relationship between bond price and yield?
- Bond price and yield move inversely. When interest rates rise, existing bond prices fall (to make their fixed coupon payments competitive with the new higher rates). When rates fall, existing bond prices rise. A bond trading at face value (par) has a YTM equal to its coupon rate. A bond trading at a discount has a YTM above its coupon rate. A bond trading at a premium has a YTM below its coupon rate.
- Are Government of Canada bond yields taxed differently from corporate bond yields?
- No. Coupon interest from both federal government bonds and corporate bonds is fully taxable as interest income in the year received or accrued (ITA s.12(1)(c)). There is no special federal tax rate for government bond income. Interest income is taxed at the investor's full marginal rate, unlike eligible dividends (which benefit from the dividend tax credit) or capital gains (50% inclusion).
- What are the current Government of Canada bond yields?
- The Bank of Canada publishes daily Government of Canada benchmark bond yields. As of early 2026, the 2-year GoC bond yield is approximately 2.8% to 3.2%, the 5-year is approximately 3.1% to 3.4%, and the 10-year is approximately 3.3% to 3.6%. These yields reflect market expectations for monetary policy and inflation. Actual yields change daily.
- What is a strip bond in Canada?
- A strip bond (zero-coupon bond) is created by separating the coupon payments from the principal repayment of a Government of Canada bond. Strip bonds are sold at a discount and pay no periodic interest; all return comes from the difference between the purchase price and the face value at maturity. Strip bonds are issued in multiples of $1,000 face value and have a predictable return if held to maturity. The accrued discount is taxable annually even though no cash is received (ITA s.12(9) and s.16(1)).
- What is the difference between current yield and YTM?
- Current yield = annual coupon / current price. YTM accounts for the price discount or premium at maturity in addition to coupon payments. For a bond trading at a discount, current yield understates YTM because it ignores the capital gain at maturity. For a bond trading at a premium, current yield overstates YTM because it ignores the capital loss at maturity.
- How are Canadian bond ETFs taxed?
- Bond ETF distributions are typically interest income and fully taxable at the investor's marginal rate in a non-registered account. Capital gains distributions from bond ETF sales within the fund are taxed at 50% inclusion (or 2/3 for gains above the $250,000 individual threshold under Budget 2024 proposals). Holding bond ETFs in a TFSA or RRSP eliminates the annual tax drag on interest income.
- What is duration and how does it relate to YTM?
- Duration (Macaulay duration) is the weighted average time to receive all cash flows from a bond, measured in years. It represents interest rate sensitivity: a bond with duration of 7 years will lose approximately 7% in price for each 1% increase in yield (and gain approximately 7% for a 1% decrease). Longer maturity and lower coupon bonds have higher duration and greater price sensitivity to yield changes.
- Are provincial bonds yields higher than federal bonds in Canada?
- Yes. Provincial government bonds trade at a credit spread above Government of Canada bonds of similar maturity. In 2025, this spread is typically 50 to 120 basis points (0.5% to 1.2%) depending on the province's credit rating and fiscal position. Alberta and British Columbia historically trade at narrower spreads; Quebec and some Atlantic provinces trade at wider spreads. This spread compensates for slightly higher credit risk relative to the federal government.