Our Henssler Ten Year Rule states that money needed within the next 10 years should be invested in high quality fixed-income securities to help shield it from stock market volatility. We generally recommend U.S. Treasury bonds because they are backed by the full faith and credit of the U.S. government, FDIC insured certificates of deposit, or high-quality municipal bonds. While most investors focus primarily on a bond’s interest rate, or coupon rate, what often receives far less attention is the bond’s yield to maturity.
Let’s say you know you will need $100,000 in 2036. Following our investment philosophy, we would recommend purchasing bonds in 2026 that mature in 2036 with a face value of $100,000. A newly issued 10-year Treasury bond yields approximately 4.20%.
If you purchased the bond at face value, you would earn 4.20% annually, or $4,200 per year, and receive your $100,000 principal at maturity. This stated interest rate is known as the coupon rate, a term dating back to the days when physical bond certificates included detachable coupons investors redeemed for interest payments.
Bonds continue trading in the secondary market after they are issued. Just like stocks, bond prices fluctuate when interest rates change, which is where yield to maturity becomes important. The coupon rate generally remains fixed for the life of the bond, but a bond’s yield to maturity fluctuates based on its market price, the time remaining until maturity, and prevailing interest rates.
For example, suppose that by 2028, newly issued Treasury bonds are paying 5.25%. Investors would be unlikely to pay full price for an older bond paying a coupon of only 4.20%. To make the lower coupon bond competitive with current market yields, its price would need to fall below face value.
As a result, the 2036 bond with a $100,000 face value might trade for approximately $93,000 to $95,000, depending on market conditions and the remaining time to maturity.
Now, assume you purchased that bond in 2028 for $93,000. Even though the coupon rate remains 4.20%, you still receive the full $100,000 face value when the bond matures in 2036.
Yield to maturity measures the total return you would earn if you held the bond until maturity. In this example, you would continue receiving the annual $4,200 interest payments, but you would also benefit from the bond appreciating from your $93,000 purchase price back to its $100,000 maturity value. That additional $7,000 gain increases your overall return, resulting in an approximate yield to maturity of 5.26%, bringing the bond’s total return in line with prevailing market rates.
This is why investors should look beyond a bond’s coupon rate alone. Purchasing a bond below par value can significantly increase its yield to maturity.
For investors who purchased bonds several years ago and still hold them today, it may be tempting to sell lower-coupon bonds and purchase newer issues offering higher stated yields. However, because rising interest rates generally reduce existing bond prices, selling those bonds may require realizing a loss.
In many cases, especially within the Treasury market, bonds of similar credit quality and maturity trade at similar yields. For investors holding bonds to meet future spending needs the focus should remain on preserving principal and understanding the bond’s yield to maturity rather than simply chasing a higher coupon rate.
If you have questions on your fixed-income investments, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the May 9, 2026 “Henssler Money Talks” episode.
Disclosure: This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products. |