Bond Yield

Bond yield refers to the return an investor can expect to earn from holding a bond, expressed as a percentage of the bond’s current market price. There are several types of bond yields, including the current yield, which is calculated by dividing the bond’s annual interest payment by its current market price, and yield to maturity (YTM), which considers the total return expected over the life of the bond if held to maturity.

Example

If an investor buys a bond with a face value of $1,000, an annual interest payment of $50, and a current market price of $950, the current yield would be approximately 5.26% ($50 / $950).

Key points

• Bond yield is the return expected from holding a bond, expressed as a percentage.

• Includes current yield and yield to maturity (YTM).

• Fluctuates based on interest rates, bond prices, and issuer creditworthiness.

Quick Answers to Curious Questions

What is the difference between current yield and yield to maturity?

Current yield is the bond’s annual interest payment divided by its current market price, while yield to maturity (YTM) considers the total return expected if the bond is held until it matures.

How do interest rates affect bond yields?

When interest rates rise, bond prices typically fall, leading to higher yields, and vice versa.

Why do higher bond yields indicate higher risk?

Higher yields compensate investors for taking on more risk, such as credit risk or interest rate risk, associated with the bond issuer or market conditions.