What Is Bond Yield?
Bond yield is the return an investor realizes on a bond. The bond yield can be defined in different ways. Setting the bond yield equal to its coupon rate is the simplest definition. The current yield is a function of the bond's price and its coupon or interest payment, which will be more accurate than the coupon yield if the bond's price is different from its face value.
Traders pay attention to bond yields because they reflect investor confidence.
If there is a weak demand for a bond, its yields rise to attract more buyers.
On the other hand, lower bond yields typically imply a high demand from investors, either because they are confident that they will get paid back at maturity or feel it is a safe place to hold their assets.
The interest rate the bond issuer will pay is called the coupon, and it is fixed, but the yield varies because the formula depends on the bond's price in the market.
For example, if you pay $100 for a bond with an interest rate of 5%, the yield you receive will be 5%.
But if you bought that same bond for $88, the yield would be about 5.7%.
This figure is known as the current yield.
It’s based on market price and is the one most commonly used by investors to compare bonds.
There are other types of bond yield to look at.
- Nominal yield is the interest paid out divided by the bond’s face (original) value.
- Yield to maturity shows the average result you can expect bond if you hold it until it reaches the end of its term.