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Yield Formula:
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Bond yield represents the return an investor realizes on a bond. The simplest form of yield is calculated by taking the bond's annual coupon payments and dividing by the bond's current market price.
The calculator uses the basic yield formula:
Where:
Explanation: This calculation gives you the current yield, which represents the annual return based on the bond's current price rather than its face value.
Details: Calculating bond yield is essential for investors to compare different bond investments, assess returns relative to risk, and make informed investment decisions in fixed income securities.
Tips: Enter the annual coupon payment in dollars and the current market price of the bond in dollars. Both values must be positive numbers, with the price greater than zero.
Q1: What's the difference between current yield and yield to maturity?
A: Current yield only considers annual coupon payments relative to current price, while yield to maturity accounts for all future cash flows including the return of principal at maturity.
Q2: Why does yield increase when bond price decreases?
A: Yield and bond price have an inverse relationship. When market interest rates rise, existing bonds with lower coupon rates become less attractive, causing their prices to fall and yields to rise.
Q3: What is considered a good bond yield?
A: This depends on current interest rates, the bond's credit rating, and its maturity. Generally, higher-rated bonds offer lower yields, while riskier bonds offer higher yields to compensate investors.
Q4: Does this calculator work for all types of bonds?
A: This calculator provides the current yield, which is applicable to most bonds. However, for zero-coupon bonds or bonds with variable rates, different calculations may be needed.
Q5: How often is bond yield typically calculated?
A: Yield is typically calculated and quoted on a daily basis as bond prices fluctuate in the secondary market. Many investors monitor yield changes regularly when managing bond portfolios.