Why does the coupon effect mean that higher yields do not necessarily mean that a bond is more attractive?

In Tuckman, it says "The fact that fairly priced bonds of the same maturity but different coupons have different yields-to-maturity is called the coupon effect. The implication of this effect is that yield is not a reliable measure of relative value. Just because one fixed income security has a higher yield than another does not necessarily mean that it is a better investment. Any such difference may very well be due to the relationship between the time pattern of the security's cash flows and the term structure of spot rates."

Surely higher yields still mean that the investment is better? I am not sure what it is saying here.

• You can't just look at maturity. The yield of a 5% 2025 bond and a 1% 2025 bonds are not directly comparable. Sure the 2 bonds have same maturity, but with the 5% bond you get your cash flows sooner (technically: shorter duration). So in a rising Term Structure the 5% has lower yield than the 1%. Effectively you are lending money for a longer period of time with the 1%. (Only for ZCB is maturity and duration identical). – noob2 Dec 8 '20 at 17:25
• @noob2 Thank you - what, for example, would make an appropriate comparison of yields? – junior_pm Dec 8 '20 at 17:35
• "what, for example, would make an appropriate comparison of yields" - would guess something like OAS or ASW spread. – user42108 Dec 8 '20 at 18:12
• Tuckman is a very good writer. Having convinced you early on that yield comparison is not sufficient for relative value, he has motivated you to read the remaining several hundred pages where he discusses this issue, which is basically what modern quant finance is all about. :) – noob2 Dec 8 '20 at 18:13

2. Find the yield $$y$$ such the discounted cashflows using this "single constant rate" equals the bond price. So think of the yield as an average interest rate that would apply for all the cashflows. As a first order approximation, the yield is the "cashflow-time"-weighted average interest rate.