2024-06-16 06:15:12, 回應(0), 人氣(35)Bond Yield: What It Is, Why It Matters, and How It's Calculated
By ADAM HAYES
Updated June 04, 2024
Reviewed by CIERRA MURRY
Fact checked by KATRINA MUNICHIELLO
What Is a Bond Yield?
A bond yield is the return an investor realizes on a bond. Put simply, a bond yield is the return on the capital invested by an investor. Bond yields are different from bond prices—both of which share an inverse relationship. The yield matches the bond's coupon rate when the bond is issued. Bond yields can be derived in different ways, including the coupon yield and current yield. Additional calculations of a bond's yield include yield to maturity (YTM) among others.
KEY TAKEAWAYS
- Bond yield is the return an investor realizes on an investment in a bond.
- A bond can be purchased for more than its face value, at a premium, or less than its face value, at a discount.
- The current yield is the bond's coupon rate divided by its market price.
- Price and yield are inversely related and as the price of a bond goes up, its yield goes down.
Investopedia / Daniel Fishel
Understanding Bond Yields
Bonds are essentially a loan to bond issuers. They are considered safe investments. That's because bond values don't change the same way stock prices do. They offer investors a reliable stream of income and provide bondholders with a fixed form of income.
Investors earn interest on a bond throughout the life of the asset and receive the face value of the bond upon maturity. Investors can purchase bonds for more than their face value at a premium or less than the face value at a discount. Whichever they buy will change the yield they earn on the bond.
Bonds are rated by services approved by the Securities and Exchange Commission (SEC) and ratings range from "AAA" as investment grade with the lowest risk to "D," which are bonds in default, or junk bonds, with the highest risk.1
Forbes. "What Are Bond Rating Agencies?"
The return realized by a bond investor is called the yield. There are a couple of different yield-related concepts. These include the:
- Coupon Yield: This is the annual interest rate established when the bond is issued. This figure remains the same for the lifetime of the bond.
- Current Yield: This figure depends on the bond's price and its coupon (or its interest payment). So if the price of the bond changes, the bond's yield also changes.
Formula and Calculation of a Bond Yield
The simplest way to calculate a bond yield is to divide its coupon payment by the face value of the bond. This is called the coupon rate.2
Coupon Rate=Annual Coupon PaymentBond Face ValueCoupon Rate=Bond Face ValueAnnual Coupon Payment
If a bond has a face value of $1,000 and made interest or coupon payments of $100 per year, then its coupon rate is 10% or $100 ÷ $1,000.Bonds are essentially a loan to bond issuers. They are considered safe investments. That's because bond values don't change the same way stock prices do. They offer investors a reliable stream of income and provide bondholders with a fixed form of income.
Bond Yield vs. Bond Price
Price and yield are inversely related. This means that as the price of a bond goes up, its yield goes down. Conversely, as the yield goes up, the price of the bond goes down.
If an investor purchases a bond with a face value of $1000 that matures in five years with a 10% annual coupon rate, the bond pays 10%, or $100, in interest annually. If interest rates rise above 10%, the bond's price will fall if the investor decides to sell it.3
If the interest rate for similar investments rises to 12%, the original bond will still earn a coupon payment of $100, which would be unattractive to investors who can buy bonds that pay $120 as interest rates have risen. To sell the original $1000 bond, the price can be lowered so that the coupon payments and maturity value equal a yield of 12%.
If interest rates fall, the bond's price would rise because its coupon payment is more attractive. The further rates fall, the higher the bond's price will rise. In either scenario, the coupon rate no longer has any meaning for a new investor. But if the annual coupon payment is divided by the bond's price, the investor can calculate the current yield and get an estimate of the bond's true yield.
Current Yield=Annual Coupon PaymentBond PriceCurrent Yield=Bond PriceAnnual Coupon Payment
The current yield and the coupon rate are incomplete calculations for a bond's yield because they do not account for the time value of money, maturity value, or payment frequency, and more complex calculations are required.
Additional Bond Yield Calculations
As noted above, there are additional calculations of a bond's yield. These include the YTM, bond equivalent yield (BEY), and effective annual yield (EAY).
Yield to Maturity (YTM)
A bond's yield to maturity is equal to the interest rate which makes the present value of all a bond's future cash flows equal to its current price. These cash flows include all the coupon payments and maturity value. Solving for YTM is a trial and error process that can be done on a financial calculator, but the formula is as follows:
Yield to Maturity (YTM)
A bond's yield to maturity is equal to the interest rate which makes the present value of all a bond's future cash flows equal to its current price. These cash flows include all the coupon payments and maturity value. Solving for YTM is a trial and error process that can be done on a financial calculator, but the formula is as follows:
Yield to Maturity (YTM) A bond's yield to maturity
is equal to the interest rate
which makes the present value of all a bond's future cash flows equal to its current price. These cash flows include all the coupon payments and maturity value. Solving for YTM is a trial and error process that can be done on a financial calculator, but the formula is as follows: