Bond Yield

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%, ask: "What definition of yield are you using?"

You hear the word "yield" a lot with respect to bond investing. There are, in fact, a number of types of yield. The terms are important to understand because they are used to compare one bond with another to find out which is the better investment.

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%. 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% trading at 103 ($1,030).
  
  

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

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.