What Are Bond Yields?

What are bond yields? When investing in bonds the phrase “bond yields” will often be included. The simple definition of a bond yield can be deceptive. This is because there are many other factors which affect a bond’s value on the open market. Measuring bond yield simply is to determine the amount of interest, also referred to as a return or coupon amount, on bonds. There is a simple formula to get this information: bond yield equals the coupon or interest amount divided by the current bond price. If one is purchasing the bond at par, meaning a newly issued bond which has not been previously issued, bond yields will be the interest rate stated on the bond itself.

Bonds On The Open Market

While buying bonds direct from the government or other source as the first recipient, measuring bond yield only includes a little reading. This is however not always the norm. More now than ever bonds are bought and sold on the open market. In the open market a bond’s yield and worth are not determined by its issuer, but rather by market demand. This is because many investors, bond mutual funds, and other entities trade bonds for profit and liquidity. This means more and more investors are buying bonds which have been issued for some time already and measuring the bond yield takes on a more mathematic approach. To clarify measuring bond yield on the open market, follow this example:

If measuring bond yield on a $5,000 bond you would need the original coupon or interest amount and also the current bond’s value. If the bond was new and the interest rate was 10%, the calculation would be simple: bond yield equals 10% or $500 of $5,000. If however the bond is on the open market and has some time on it, it may only be worth $4,000 meaning that same $500 coupon rate holds true still, but the bond yield has now decreased to 12.5%.

What Are Bond Yields?

Bonds On The Open Market

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