Bond Yield
What Is Bond Yield?
Bond yield is the return an investor earns from holding a bond. It represents the income generated by the bond relative to its price and is usually expressed as a percentage.
While bonds pay interest through a coupon rate, the yield reflects the bond’s actual return based on its current market price.
Why It Matters
Bond yield helps investors evaluate whether a bond investment offers a competitive return compared with other investments such as stocks, savings accounts, or other bonds.
Changes in bond yields also influence the broader financial system. Mortgage rates, business loans, and government borrowing costs often move in response to changes in bond yields.
How Bond Yield Works
Bond yield depends on several factors:
- the bond’s coupon rate
- the bond’s market price
- the bond’s maturity date
When a bond’s market price changes, its yield changes as well.
For example:
- If bond prices rise, yields fall
- If bond prices fall, yields rise
Investors often evaluate bonds using measures such as current yield or yield to maturity (YTM).
Example
If a $1,000 bond pays $50 annually in interest, its coupon rate is 5%. If the bond trades for $900 in the market, its yield becomes higher than 5%.
Bond Yield vs Coupon Rate
- Coupon rate is the fixed interest rate set when the bond is issued.
- Bond yield reflects the bond’s return based on its current market price.
FAQs About Bond Yield
Why do bond yields change?
They fluctuate based on interest rates, inflation expectations, and investor demand.
Do higher yields mean better investments?
Not always. Higher yields often reflect higher risk.
What is yield to maturity?
It estimates the total return if the bond is held until maturity.
Related Terms
