
Any discussion of portfolio returns must also include the variety of ways that bond income may influence a portfolio's rate of return. While the stated (nominal) interest rate on a bond might appear to be the only measure of a bond yield, it is only accurate if you buy a bond at par and hold it until the bond matures. However, many investors buy a bond at a price above or below par, and many sell prior to maturity. The following measures are used to reflect these circumstances:

Yield to maturity  This is the return based on the actual purchase price of the bond. It takes any premium or discount over par into account and uses the actual time to maturity for the number of compounding periods. If the bond was purchased at par, the yield to maturity will equal the stated coupon rate.
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Yield to call  This is a similar calculation, but it uses the call date for the number of compounding periods and incorporates any call premium into the future value.
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Current yield  This is simply the annual income divided by the market value of the bond. If the bond is trading at a premium, the current yield will be less than the nominal yield. If the bond is trading at a discount, the current yield will be greater than the nominal yield.
Â  Real interest rate  The investor receives this rate after inflation is taken into account. In essence, the nominal interest rate = the real interest rate plus an inflation premium. The inflation premium is typically higher for bonds with longer maturities.
Exam Tips and Tricks
Consider this sample question:
The method of evaluating investment returns that calculates the interest rate which discounts cash inflows and outflows to a present value of zero is called:
 inflationadjusted return.
 internal rate of return.
 total return.
 net present value.
The correct answer is "b": "d" is incorrect because the method referred to incorporates the concept of net present value, but it is not a definition of that term.
Introduction

Investing
How To Evaluate Bond Performance
Learn about how investors should evaluate bond performance. See how the maturity of a bond can impact its exposure to interest rate risk. 
Investing
Understanding the Different Types of Bond Yields
Any investor, private or institutional, should be aware of the diverse types and calculations of bond yields before an actual investment. 
Investing
Understanding Bond Prices and Yields
Understanding this relationship can help an investor in any market. 
Financial Advisor
Simple Math for FixedCoupon Corporate Bonds
A guide to help to understand the simple math behind fixedcoupon corporate bonds. 
Investing
Comparing Yield To Maturity And The Coupon Rate
Investors base investing decisions and strategies on yield to maturity more so than coupon rates. 
Investing
Understanding Interest Rates, Inflation And Bonds
Get to know the relationships that determine a bond's price and its payout. 
Investing
How Do I Calculate Yield To Maturity Of A Zero Coupon Bond?
Yield to maturity is a basic investing concept used by investors to compare bonds of different coupons and times until maturity. 
Investing
Calculating Bond Equivalent Yield
The bond equivalent yield calculates the semiannual, quarterly or monthly yield on a discount bond or note. 
Investing
Bond Yields: Current Yield And YTM
A bond's current yield, also called "bond yield," is the interest it pays annually divided by the bond's price. A stock's current yield, also called "dividend yield," is the sum of its annual ...