What is a bond yield?
Short answer
A bond yield is the return an investor earns from a bond, expressed as an annual percentage. Yields and bond prices move in opposite directions: when a bond’s price falls, its yield rises.
What a bond is
A bond is a loan made to a government or company. The issuer promises to pay a fixed or floating interest amount, called the coupon, and to repay the face value (principal) on a set maturity date. Bonds can be bought and sold before maturity, so their price changes.
Coupon, current yield and yield to maturity
The coupon rate is the annual interest as a percentage of face value and is fixed when the bond is issued. The current yield compares that interest with today’s price. The yield to maturity (YTM) is the single annual rate that makes the present value of all remaining payments equal to the price, assuming the bond is held to maturity and every payment is made.
Worked example (illustrative arithmetic): a bond with a face value of 1,000 and a 5% coupon pays 50 a year. If its price is 1,000, the current yield is 5%. If the price falls to 950, the current yield is 50 / 950 = about 5.26%. The yield rose because the price fell.
Current yield = annual coupon / current price x 100What moves yields
Yields respond to expected policy rates, inflation, the supply of new bonds and the issuer’s credit risk. Longer bonds are more sensitive to rate changes than short ones, a property measured by duration. A government bond yield is often used as a benchmark; the extra yield on a corporate bond over a comparable government bond is its credit spread.