Bond Yield Calculator
Calculate the current yield for a bond using our bond yield calculator.
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How to Calculate Bond Yield
Bonds are often a critical component of both short-term and long-term investment strategies. Through the use of bonds, investors can control their ongoing exposure to various sources of risk and can also make their portfolio performance much more predictable.
The importance of bonds in the broader financial system is truly undeniable. However, it is also important for investors to think about the return on investment they are generating with every bond they purchase.
Bonds, unlike stocks, have a predictable future payout—at least, as long as the issuer of the bond (corporate or governmental) doesn’t default. So as long as there is no possibility of default, the nominal return on investment from any bond purchase should be very predictable.
The term used to describe the return generated by a bond investment until it reaches maturity is bond yield. By knowing how to calculate bond yield, investors can easily compare different bond investments and determine which investment will be best for them.
Below, we will discuss the most important things to know about how to calculate bond yield, including the key terms you need to understand and the formula that will be most useful.
What Are Bonds?
Bonds are a type of fixed-income securities, meaning that their future returns will be pre-determined (barring default), rather than being speculative. Generally, ownership of a bond involves paying a certain amount of money today in order to get a larger amount of money in the future.
Bonds are issued by a variety of different entities, including corporations and various levels of government. Because the only real risk associated with investing in bonds, other than inflation, is the risk of default, it is up to the investor to determine which bonds are most likely to default and which are most likely to pay out as promised.
There are many different organizations that evaluate the general riskiness of bonds, including S&P, Moody’s, and others.
As suggested, investors often use bonds to control their exposure to general market risk. When markets are volatile, many investors will move their capital away from speculative markets (like stocks) and toward the bond market.
When markets are stable and rallying, the equity will likely be moved out of bonds and back towards assets that offer a higher rate of return (like stocks).
Bond Yield Terminology
The bond market uses finance-specific terminology. In order to navigate this multi-trillion dollar market with ease, it is important to understand the following terms:
- Current Price: The cost to purchase a particular bond on the open market.
- Par Value: The amount the bond will pay the holder once it has reached maturity—the standard par value for a bond is $1,000, though there are some exceptions to this rule.
- Coupon Rate: The amount of income (usually paid annually) an investor can expect to receive while holding an immature bond.
- Years to Maturity: The amount of time until the bond reaches maturity.
- Current Yield: The annual income produced by the bond divided by the price of the bond.
- Yield to Maturity (YTM): The total rate of return for a bond if that bond is held to maturity.
How to Calculate a Bond’s Current Yield
To calculate a bond’s current yield, you need to know the annual coupon payment and the bond’s current price. Once you have these two figures, which should be readily available, all you need to do is divide the annual coupon payment by the current price.
Bond Yield Formula
Thus, the bond yield formula is:
current yield = annual coupon payment / current price
If a bond is currently priced at $800 and offers a $100 annual coupon payment, that bond’s current yield would be:
current yield = $800 / $100
current yield = 12.5%
So in this example, the current yield is 12.5 percent.
How to Calculate the Yield to Maturity
Calculating yield to maturity is a little more complicated than calculating current yield but using a yield to maturity calculator can help.
To make this calculation, you will need to identify the annual interest rate, the face value of the bond, the current price, and the time to maturity. Then use this yield to maturity formula:
C = coupon rate
FV = face value
PV = present value (current price)
n = years to maturity
This will reveal the total rate of return if you were to hold the bond until it has fully matured.
Of course, you could always use a yield to maturity calculator to solve this as well.
This is not financial advice or a guarantee of success, so be sure to consult with a financial professional and understand the risk associated with any bond you are considering before investing.
Frequently Asked Questions
What is the difference between the current yield of a bond and its yield to maturity?
The current yield of a bond is its annual rate of return while the yield to maturity is the total rate of return for a bond if that bond is held to maturity.
What impacts bond yields?
Interest rates impact bond yields the most, however, other things can affect certain types of bonds such as inflation, company metrics (for corporate bonds), and market conditions.
Why are bond yields important in the US economy?
Bond yields can tell investors a few things about current market conditions. When the price of bonds drop, this means that interest rates have risen and overall bond yields have risen. The opposite is true: when interest rates fall, bond prices increase and yields decrease.
Inflation also has the same impact as rising or falling interest rates on bonds and their yields.
In addition, treasury bonds, in particular, are very important because they are used to set the rates for other bonds and fund the federal government.