Smart Bond Investing—Yield and Return

Yield and Return

 

Yield is a general term that relates to the return on the capital you invest in the bond.

 

Smart Move When someone tells you a bond's yield is 7 percent, ask: "What definition of yield are you using?"

 

There are several definitions that are important to understand: coupon yield, current yield, yield-to-maturity, yield-to-call and yield-to-worst.

 

Let's start with the basic yield concepts.

 

  • Coupon yield is the annual interest rate established when the bond is issued. It's the same as the coupon rate and is the amount of income you collect on a bond, expressed as a percentage of your original investment. If you buy a bond for $1,000 and receive $45 in annual interest payments, your coupon yield is 4.5 percent. This amount is figured as a percentage of the bond's par value and will not change during the lifespan of the bond.
     
  • Current yield is the bond's coupon yield divided by its market price. Here's the math on a bond with a coupon yield of 4.5 percent trading at 103 ($1,030).

 

 

Current Yield Math Example 1

 

 

Say you check the bond's price later, and it's trading at 101 ($1,010). The current yield has changed:

 

 

Current Yield Math Example 2

 

 

If you buy a new bond at par and hold it to maturity, your current yield when the bond matures will be the same as the coupon yield.

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    Yields that Matter More