# Bond yield definition

a way of measuring the returns that will be made from a bond

Bond yield meaning

Bond yield helps investors to calculate the returns that they will make on their investment.

This is not to be confused with the coupon rate, which states the annual amount of interest that will be paid to the owner of a bond.

How bond yields work

Most bonds have a face value of \$1,000, but their prices can go up and down on the secondary market. Bond prices and bond yields have an inverse correlation – meaning that as one goes up, one goes down.

Let’s imagine that Robert purchased a \$1,000 bond with a coupon rate of 10%. It is due to mature in 30 years’ time and will pay a fixed amount of \$100 in interest every year.

Ten years later, and newer bonds are coming with a coupon rate of 20%. This makes Robert’s current bond unattractive, because it pays less interest. As a result, a buyer may only be prepared to pay \$500 for his bond. As they would continue to receive \$100 interest annually, this would amount to a 20% yield on their investment and equalize the rates.

Alternatively, let’s imagine that newer bonds have a coupon rate of 5% instead – making Robert’s older bond a more attractive investment because it has a coupon rate of 10%. Now, he would be able to sell his financial instrument at a premium of \$2,000. By dividing the annual coupon payment of \$100 against the newly inflated bond price, we can see that it has a current yield of 5%.

Do yields matter?

That depends on an investor’s perspective and long-term goals. If they were planning to hold on to their bond until maturity – irrespective of changing economic conditions – the only measurement of return that will matter to them is the coupon rate.

The material provided on this website is for information purposes only and should not be regarded as investment research or investment advice. Any opinion that may be provided on this page is a subjective point of view of the author and does not constitute a recommendation by Currency Com or its partners. We do not make any endorsements or warranty on the accuracy or completeness of the information that is provided on this page. By relying on the information on this page, you acknowledge that you are acting knowingly and independently and that you accept all the risks involved.