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.
Bond Yield
Definition: Bond yield is the return that an investor receives from a bond. In simple terms, bond yield is the capital return on an investor's investment. Bond yield is different from bond price, and they have an inverse relationship. Bond yield matches the bond's coupon rate at issuance. Bond yield can be calculated in various ways, including coupon yield and current yield. Other calculations of bond yield include Yield to Maturity (YTM).
Origin
The concept of bond yield can be traced back to the early development of the bond market. Bonds, as a type of fixed-income security, first appeared in the 17th century in Europe, particularly in the Netherlands and the UK. As financial markets evolved, the methods for calculating bond yields also developed and improved.
Categories and Characteristics
Bond yields are mainly divided into the following categories:
- Coupon Yield: This is the simplest method of yield calculation, which is the ratio of the bond's annual coupon to its face value. It is suitable for investors who want to understand the fixed annual income from the bond.
- Current Yield: This is the ratio of the bond's annual coupon to its market price, reflecting the investor's yield under current market conditions.
- Yield to Maturity (YTM): This is the most comprehensive yield calculation method, considering the bond's coupon, market price, face value, and maturity time. YTM reflects the total return an investor can get if they hold the bond until maturity.
Specific Cases
Case 1: Suppose an investor buys a bond with a face value of $1000, an annual coupon of $50, and a market price of $950. The coupon yield is 50/1000=5%, and the current yield is 50/950≈5.26%.
Case 2: Another investor buys a bond with a face value of $1000, an annual coupon of $60, a market price of $1050, and the bond has 5 years to maturity. By calculating the Yield to Maturity (YTM), the investor can determine their actual annualized return.
Common Questions
Q1: Why do bond yields and bond prices have an inverse relationship?
A1: When bond prices rise, investors need to pay more to receive the same coupon, thus the yield decreases; and vice versa.
Q2: What is the difference between Yield to Maturity (YTM) and coupon yield?
A2: Coupon yield only considers the ratio of the annual coupon to the face value, while Yield to Maturity (YTM) comprehensively considers the coupon, market price, face value, and maturity time, providing a more comprehensive yield assessment.
