Nine percent, and what is left of it

1Three doors

A fixed deposit matures on a Monday morning. Five lakh rupees, back with the man who parked them there five years ago, and a clerk waiting to know what he would like to do next.

Call him Vikram. He has three doors in front of him.

Behind the first, nothing happens. The money stays in his savings account at 2.50 percent a year, the rate his bank has published since June 2025.

Behind the second is a cumulative bond at 9 percent. Nothing is paid out. Every rupee of interest is rolled back in and left to work until the bond matures in ten years.

Behind the third is the same 9 percent bond, except that it pays. Forty five thousand rupees land in his account every year, and every year he spends them. School fees. A long trip. The electricity bill in a bad summer.

Ten years later, this is where the money sits.

Door one leaves him with ₹6,41,513. Door two with ₹11,83,682. Door three with his ₹5,00,000 back, plus ₹4,50,000 that passed through his hands and into his life.

Look at the second and third doors again. Same issuer. Same 9 percent. Same ten years. Same promise, kept to the paisa. The bond did not behave differently in one and the other. The only thing that changed is what happened to the interest after it arrived.

That gap is what this chapter is about. A yield is a rate. It describes money while it is inside the bond, for one year, as though nothing else in the world were happening. What you walk away with is a different number, and four things stand between the two: the calendar, your own choices, the tax department, and the price of everything.

2A yield is a rate, and the year is an assumption

Start with the smallest version of the problem, because it is the one that catches everybody once.

A treasury bill is the government borrowing for a few months. It pays no interest at all. You buy it below ₹100 and you are paid ₹100 at the end, and the difference is the whole of your return. In an auction on 27 August 2026 the 91 day bill was sold at ₹98.7046. Put in ₹9,870.46, get ₹10,000 back, ninety one days later. Your gain is ₹129.54.

The screen will tell you that bill yields 5.26 percent.

You are not getting 5.26 percent. You are getting 1.31 percent, once, for holding something for three months. The 5.26 is that gain stretched across a year you will not be holding it for.

The stretching is not a trick and it is not hidden. RBI prints the formula in its own primer on government securities: take the gain, divide it by what you paid, and multiply by 365 over the number of days.

Figure 1

Every yield you will ever see does a version of this. It takes what happens over some stretch of time and reports it as a rate per year, because a rate per year is the only way to compare a bill that runs for three months against a bond that runs for thirty. The rate is useful. The rate is honest. The rate is also not the money, and the further the real holding period sits from one year, the louder that difference gets.

Hold on to this one sentence. A yield answers a single question and refuses every other: at this price, on these payments, what rate per year would this work out to? It says nothing about what you do next. It also assumes you stay to the end. Sell before that and the number never described you at all, because what you walked away with is whatever the next buyer was willing to pay.

3What the coupons do while they wait

Back to Vikram's bond. It pays him ₹45,000 a year for ten years and returns his ₹5,00,000 at the end. That much is fixed. It is written into the instrument and the issuer has no say in it after the day it is sold.

What is not fixed is where each ₹45,000 goes in the hours after it lands. There are three honest answers, and they end in three different places.

Left in a drawer, the coupons add up to ₹4,50,000 and nothing more. Left in the savings account, they quietly earn a little on the way, and the pile reaches ₹10,04,697. Put back into something paying the same 9 percent, they earn what the bond earns, and the total reaches ₹11,83,682.

Read the growth rates under the bars, because they are the heart of the chapter. The whole ₹5,00,000 grew at 6.63 percent a year in the first case, 7.23 percent in the second and 9.00 percent in the third. The bond paid 9 percent in all three. It never once broke its word.

This is the single most repeated wrong thing said about bonds: that a bond's yield is only "promised", and you receive it only if you reinvest every coupon at that same rate. It is not true. The bond pays its yield on the money that is inside the bond. What the coupons do after they leave is a second investment, with its own rate, and nobody is obliged to make it a good one.

A treasury bill sidesteps the question altogether, because it pays nothing on the way: one payment, on one date, and no decision to get wrong. A cumulative bond removes the decision in the other direction. It pays nothing along the way and compounds the interest internally, which is why door two reaches 9 percent without Vikram lifting a finger. Many Indian corporate bonds are built this way. The price of that convenience is that you see no money for years, and you cannot spend what you never receive.

Which is why door three is not the loser it looks like. The ₹45,000 a year did a job. It paid for things. A retired couple living off coupons has not lost 2.37 percent a year of growth; they have bought a decade of groceries with it. The question is never which door is better. The question is whether you need the money now or later, and the yield on the screen cannot answer that for you.

4The part that was never yours

Interest from a bond is added to your income and taxed at your slab. There is no special rate for it, no indexation, nowhere to hide. At the top slab that is 30 percent, plus the 4 percent cess charged on the tax itself, which makes 31.2 percent in all.

So the ₹45,000 coupon is not a ₹45,000 coupon. It is ₹30,960, or about ₹2,580 a month.

The cumulative bond does not escape this either, and it has a sting the payout bond does not. Interest that piles up inside it is taxable as it accrues, year by year, even though not one rupee has reached you. The bond compounds. The tax bill does not wait for it.

Take the tax off Vikram's coupons, park what is left in his savings account, and the growth rate on his whole ₹5,00,000 over ten years falls from 7.23 percent to 5.26 percent. He now has ₹8,34,866.

5The quiet subtraction

There is one more number, and it is the one nobody puts on a screen at all.

In August 2026 retail prices in India were 4.82 percent higher than a year earlier. That is the Consumer Price Index, published by the National Statistics Office on 14 September 2026. It is the rate at which the things Vikram will eventually buy are quietly getting more expensive while he waits.

So his money is running, and the shops are running too. The honest way to compare them is not to subtract one from the other, though that is close enough for a quick look. It is to ask what his pile buys at the end against what it would have bought at the start:

Real return = (1 + your return) ÷ (1 + inflation) − 1. Put 5.26 percent and 4.82 percent through that and you get 0.42 percent a year.

Ten years. Nine percent on the paper. A bond that paid every rupee it promised on the day it promised. And the buying power of his ₹5,00,000 went up by about four percent in total, which is roughly what the same money would buy if he had simply found ₹21,000 under a mattress.

Put plainly: ₹8,34,866 in 2036 buys what ₹5,21,405 buys in 2026.

6The whole journey, in one picture

Four numbers, all describing the same bond, all true.

Read it left to right. Nine percent was the rate the bond paid on the money inside it. Seven point two three was what the whole ₹5,00,000 actually grew at, because the coupons spent ten years in a savings account instead of in a bond. Five point two six is what was left after the tax department took its share of every coupon. Nought point four two is what remains once the price of everything else has moved.

Nothing went wrong in that picture. There was no mis-selling, no small print, no default. This is simply what 9 percent is, once you follow it all the way to the end.

Now walk Vikram through the second door instead, where the bond compounds its own interest at 9 percent. He never has the reinvestment problem, so the first step does not happen. The journey reads 9.00, then 9.00, then 6.19 after tax, then 1.31 after inflation. Three times the real outcome of the first path, from exactly the same bond, for the single reason that the interest never stopped working.

The first row's last column is the honest cost of spending the coupons: the principal itself does not grow, so its buying power falls with prices. That is not an argument against income. It is an argument for knowing which one you chose.

7The bond that never ends

In the winter of 1624, a dike broke on the Lek river, south of Utrecht, and a large part of the Dutch countryside went under water.

The water board responsible for that stretch of dike, the Hoogheemraadschap Lekdijk Bovendams, needed money immediately, for timber and for men. It borrowed 1,200 guilders from a woman named Elsken Jorisdochter, and wrote her a bond on goatskin. It promised her interest every year, forever. It did not promise to give the 1,200 guilders back, because a water board that is still standing in a hundred years will still be collecting taxes, and a debt it never repays is a debt it never has to refinance.

That bond has been paying interest for four hundred years. It is the oldest bond in the world that is still alive. A descendant of Jorisdochter presented it to the New York Stock Exchange in 1938, which owns it to this day, and it pays out something in the region of fifteen euros a year.

The same water board sold another one in 1648, for 1,000 guilders at 5 percent, to pay the men repairing a bend in the river near Honswijk. Yale University bought that one at auction in 2003 for its rare book library, and in 2015 a librarian flew to the Netherlands to collect twelve years of unpaid interest in person. He came back with about 132 euros and a stamped certificate. The bond is in the library, and it is still running. There is a four minute film of that bond being read out loud, goatskin and all, if you would like to see what a promise looks like after four centuries.

Now ask the question this chapter has been asking all along. What is the yield of that bond?

Not yield to maturity, because there is no maturity. The whole machinery from chapter three, the pulling of a price towards face value on a known date, has nothing to pull towards. All that is left is the current yield: the coupon divided by what you paid. Nothing more can be said, because nothing more is known.

And the real yield, the one from the section above, is where the story ends. Two and a half percent on 1,200 guilders was a serious annual income in 1624. Four centuries of rising prices turned the same payment into about fifteen euros, which does not buy dinner. The bond never missed. It never defaulted, never restructured, never asked for forgiveness through a war, an occupation, a new currency or two changes of national identity. It simply kept paying exactly what it said it would pay, while the world around it got more expensive. That is inflation doing its work with no villain in the room.

India has perpetual bonds of its own. They are issued by banks as a kind of capital, they have no maturity date, and RBI allows the bank to buy them back only after five years and only with its permission. So their quoted yield is always an assumption about a date the bank gets to choose. They are sold in lots of ₹1 crore to institutions, so you are unlikely to be offered one, but the principle underneath them is the dike on the Lek: a borrower who intends to exist forever can borrow forever.

8Working out your own number

Five steps. No spreadsheet required for any of them.

Do this once on any bond you are considering and the number at the bottom will be smaller than the number at the top. That is not a reason to avoid bonds. Every instrument in the country goes through the same four subtractions, and the ones that look better usually do so because somebody has quietly skipped a step. A fixed deposit at 6.05 percent, which is what the same bank was offering for five years at the end of 2025, walks the same road and finishes further back.

What a bond gives you is a rate you can see, on a date you can read, from a borrower you can look up. The rest of the journey is yours.