FAQs
1. What is bond yield?
Bond yield measures the return an investor earns from a bond. It can be expressed as current yield (annual income ÷ price) or yield to maturity (total return if held to maturity).
2. How is bond yield calculated?
Current yield = (Annual Coupon Payment ÷ Current Bond Price) × 100. Yield to maturity is more complex, using present value formulas to find the discount rate that equates price to future cash flows.
3. What is the difference between current yield and yield to maturity?
Current yield only measures annual income relative to price. YTM includes annual income plus capital gain or loss if held to maturity. YTM is a more complete measure of return.
4. What is a good bond yield?
A good bond yield depends on the market and credit quality. Investment-grade corporate bonds yield 4-6%, high-yield bonds 6-10%, and Treasuries 3-5%. Compare to similar bonds.
5. Why is yield to maturity higher than current yield for discount bonds?
For discount bonds, YTM includes the capital gain from buying below face value and holding to maturity. Current yield only counts coupon income. The capital gain increases total return.
6. Why is yield to maturity lower than current yield for premium bonds?
For premium bonds, YTM includes the capital loss from buying above face value. This loss reduces total return below the current yield.
7. How does bond price affect yield?
Bond price and yield move inversely. When price falls, yield rises. When price rises, yield falls. This relationship is fundamental to bond investing.
8. What is the difference between YTM and yield to call?
Yield to call calculates return if the bond is called before maturity. It applies to callable bonds. YTM assumes the bond is held to maturity.