A bond's yield is a measure of its return. The yield is calculated using the bond's current market price (not its principal value) and its coupon rate.
A bond's yield calculation is best understood with an 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.What Is a Bond Yield?
How Are Bond Yields Calculated?
Bond Yield FAQs
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.
Since the maturity date and coupon rate remain constant, the yield only changes based on the market price for a given bond.
A bond purchased at its face value of $1000 with a coupon rate of 5% returns $50 annually, so its yield is 5%.
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