Definition:
Bond yield is the rate of return an investor earns on a bond. It represents the income generated by the bond, including both interest payments and any capital gains or losses from changes in the bond’s price.
Types of bond yield:
- Current yield: The annual interest payment divided by the current market price of the bond.
- Yield to maturity (YTM): The total return an investor will earn if they hold the bond to maturity, taking into account the purchase price, coupon payments, and any capital gains or losses.
- Yield to call: The yield an investor will earn if the bond is called by the issuer before maturity.
Why is bond yield important?
- Investment returns: Bond yield is a key factor in determining the return on investment for bondholders.
- Risk assessment: Bond yield can be used to assess the risk of a bond, as higher yields often indicate higher risk.
- Comparison: Bond yields can be compared to other investments to determine the relative attractiveness of different bonds.
In essence, bond yield is the rate of return an investor earns on a bond, and it’s a key factor in evaluating the attractiveness of a bond investment.
