A bond yield is a measure of the return an investor can expect to earn from holding a bond. It is expressed as a percentage and can be calculated in several ways, depending on the type of yield being considered. Here are the main types of bond yields and their definitions:
Definition: The current yield is calculated by dividing the bond’s annual interest payment by its current market price.
Formula:Current Yield = (Annual Coupon Payment / Current Market Price)Current Yield = (50 / 950) ≈ 5.26%Definition: The yield to maturity is the total return an investor can expect to earn if the bond is held until it matures. It takes into account all future coupon payments and the difference between the bond’s current market price and its face value.
Formula: The YTM is calculated using a complex formula that equates the present value of the bond’s future cash flows to its current price. It often requires a financial calculator or software to compute accurately.
Example: If an investor buys a bond for $950 with a face value of $1,000, an annual coupon of $50, and 10 years to maturity, the YTM calculation will provide the annual return expected over those 10 years.
Definition: The yield to call is similar to the yield to maturity but applies to callable bonds. It calculates the yield assuming the bond is called (redeemed by the issuer) before its maturity date at the call price.
Formula: The YTC is calculated using a formula similar to YTM but uses the call date and call price instead of the maturity date and face value.
Definition: The nominal yield, also known as the coupon yield, is the bond’s annual coupon payment divided by its face value. It represents the interest rate stated on the bond.
Formula:Nominal Yield = (Annual Coupon Payment / Face Value)Nominal Yield = (50 / 1000) = 5%<< FAQs about Bond