What is Bond Yield?
788 reads · Last updated: December 5, 2024
A bond yield is the return an investor realizes on a bond. Put simply, a bond yield is the return on the capital invested by an investor. Bond yields are different from bond prices—both of which share an inverse relationship. The yield matches the bond's coupon rate when the bond is issued. Bond yields can be derived in different ways, including the coupon yield and current yield. Additional calculations of a bond's yield include yield to maturity (YTM) among others.
Definition
Bond yield is the return investors earn on a bond, essentially the capital return on their investment. Bond yield has an inverse relationship with bond price and matches the bond's coupon rate at issuance. It can be calculated in various ways, including coupon yield and current yield.
Origin
The concept of bond yield evolved with the development of the bond market. The earliest bonds date back to the medieval Italian city-states, while the modern bond market began to form in the 17th century in the Netherlands and England. As financial markets became more complex, the methods for calculating bond yields diversified.
Categories and Features
Bond yields are primarily categorized into coupon yield, yield to maturity (YTM), and current yield. Coupon yield is the ratio of the bond's annual coupon to its face value, applicable to fixed-rate bonds. Yield to maturity considers the bond's coupon, purchase price, face value, and time to maturity, making it a common metric for assessing long-term bond returns. Current yield is the ratio of the bond's annual coupon to its market price, reflecting the bond's immediate income level.
Case Studies
Case 1: U.S. Treasury Bonds. U.S. Treasury bond yields are often seen as a benchmark for risk-free rates. In 2020, due to the pandemic, the Federal Reserve lowered interest rates to near zero, causing Treasury yields to drop significantly. Case 2: Apple Inc. Bonds. In 2013, Apple issued $17 billion in bonds, marking its first major bond issuance. Due to Apple's high credit rating, its bond yields were relatively low but still attracted many investors.
Common Issues
Investors often misunderstand the relationship between bond yield and bond price, assuming they are positively correlated. In reality, bond yield and price are inversely related: when bond prices rise, yields fall, and vice versa. Additionally, when calculating yield to maturity, investors need to consider reinvestment risk and changes in market interest rates.
