Bond Yield

Published Aug 11, 2023

Definition of Bond Yield

Bond yield is the return an investor receives from a bond investment. It is usually expressed as a percentage of the bond’s face value. That means it is the amount of money an investor earns from a bond over a certain period of time, usually one year. Bond yields can be either fixed or variable, depending on the type of bond.

Example

To illustrate this, let’s look at a 10-year bond with a face value of $1,000 and a coupon rate of 5%. That means the bond pays an annual coupon of $50. Now, if the bond is trading at par (i.e., $1,000), the yield to maturity is 5%. That means the investor earns a total return of $50 per year, which is 5% of the face value.

However, if the bond is trading at a discount (i.e., below $1,000), the yield to maturity is higher than 5%. For example, if the bond is trading at $900, the yield to maturity is 5.56%. That means the investor earns a total return of $50 per year, which is 5.56% of the face value.

Why Bond Yield Matters

Bond yields are important for investors because they provide an indication of the return they can expect from a bond investment. That means they can use bond yields to compare different bonds and decide which one is the most attractive investment.

Furthermore, bond yields are also important for governments and companies because they provide an indication of the cost of borrowing. That means they can use bond yields to determine the interest rate they have to pay when they issue new bonds.