The yield of a bond shows the anticipated return on your investment, expressed as an annual percentage.
For example, if you buy a bond paying $225 interest each year and you pay $10,000 for it, its current yield is 2.25%. If you sold the same bond later for $12,000, the buyer would have purchased it at a lower yield ($225 / $12,000 = 1.875%) although the interest (coupon) payments ($225 in this case) stayed the same.
So if the price of a bond goes up, its yield goes down, and vice versa. Compared with the coupon rate, the yield shows a more accurate picture of the actual return on your investment into a particular bond. More sophisticated calculations of the bond yield or the market price also involve the time left to maturity or interest accrued since the last coupon payment period.
What else do you need to know about bonds?
Want to learn more before deciding what’s your optimal bond allocation? You might want to check out these other articles to deepen your knowledge.
- What is a bond? (our main article in the bond section)
- How do bonds work?
- What happens when a bond comes due?