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Bond yield is the return on investment or interest earned on a bond. High yield bonds offer higher returns. Calculating the yield considers the price paid, face value, and interest payments. Yield to maturity is calculated using a calculator. Buying at a discount yields more than face value, while buying at a premium yields less. Bond prices and yields have an inverse relationship.
A bond yield is the amount of return on your investment or the amount of interest earned on a bond in which you invest your money. High yield bonds return a higher return on your investment than those with lower interest rates or yields. Part of choosing the best yield bond is calculating the yield on the bond, which considers the price paid to buy the bond, the face value of the bond, and the bond’s interest payments.
To calculate the yield on a bond, divide the bond’s face value or coupon rate by the price you pay to buy the bond. For example, a bond issued with a face value of $1,000 US Dollars (USD) with a coupon rate of 10% yields $100 USD in interest. When the same bond, with a par value of $1,000 USD, is sold at a discount rate of $800 USD, the yield on the bond increases to 12.5%.
Conversely, a bond with a face value of $1,000 USD that sells at a premium of $1,200 USD pushes the bond’s yield up to 8.33%. So, an important part of choosing the best-yielding bond is assessing whether you’re paying face value, a discount, or a premium price to buy the bond in the first place.
The second main calculation is to calculate the yield to maturity (YTM). Unfortunately, this calculation is not a simple equation. To calculate this figure you need to use a bond yield to maturity calculator, which you can find online, or use a financial calculator to enter the figures. The answer to this calculation, however, tells you how much money you will make on your investment in the bond if you hold it through the bond’s maturity date.
In short though, if you understand how bonds behave, you can choose the best bond yield. Essentially, when bond prices go up, the bond yield goes down. When bond prices fall, bond yields rise. This means that if you have the opportunity to buy a bond at a discount, you will get a greater return over the long run than if you paid a premium or face value.
If you buy the bond at a premium price, you’ll get a lower yield than if you buy it at face value or at a discount. If you buy the bond at face value, you fall right in the middle, not making as much money as buying the bond at a discount, but making more money than buying the bond at a premium.
Smart Asset.
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