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What is a Bond Yield?
A bond’s yield is a measure of its return.
For example, a bond purchased at its face value of $1000 with a coupon rate of 5% returns $50 annually, so its yield is 5%.
If the bondholder later sells the bond to another investor at a premium for $1100, the bond will still return $50 annually, but its yield will be lower.
$50 is 4.5% of $1100, so the yield to the new investor is only 4.5%.
If the same bond were to be sold for $900, the yield would be 5.5%.
Therefore, since the maturity date and coupon rate remain constant, the yield only changes based on the market price for a given bond.
Bond Yields FAQ's
A bond’s yield is a measure of its real rate of return, factoring in the number of compounding periods for the bond.
A bond’s yield is calculated using the bond’s current market price (not its principal value) and its coupon rate.
A bond’s yield is important to investors who are looking for the best possible rate of return on their money, regardless of the bond’s current value.