Debt Securities - Yield

Now that you know the different flavors of government bonds, it is time to learn how yields are computed.

Nominal Yield (Coupon Rate)

  • The interest rate defined on the coupon.
  • This is generally the interest rate you receive if:
    • you acquired the bond at par (that is, at neither a discount nor a premium to its par value)
    • there is no call feature on the bond
    • you don't reinvest coupon payments and,
    • you are resolved to hold the bond until maturity
  • In reality, it is almost certainly not your actual interest rate.


Current Yield

  • Factors in the bond's market price, which is generally not the same as par value.
  • Consider the following application:
    Look Out!
    Say you bought a $1,000 par value bond with a coupon rate of 10% per year. Let\'s not worry about timing of payments right now and just assume that, on the last day of the year, you get your $100 interest payment ($1,000 x 10% = $100). But wait - you did not buy that bond directly from the issuer. You bought it on the open market for $750, so your yield is 13.3% ($100/$750). You still get the same $100, but on an investment of $750, not $1,000.



    Yield to Maturity
    Considers the current market price, the coupon rate and the time to maturity and assumes that interest payments are reinvested at the bond's coupon rate. This is the most accurate, and most widely quoted, measure of return on a bond.



    Exam Tips and Tricks

    You may need to identify yield to maturity on the Series 7 exam, but you will probably not need to perform the complex calculation.


Computing T-bill Discount Yield
Related Articles
  1. Brokers

    Broker-Dealer Industry 101: The Landscape

    Independent broker-dealers are a great choice for experienced, self-starter planners who have established practices.
  2. Personal Finance

    RIAs and Brokers: What's the Difference?

    RIAs and brokers are held to different standards when providing investment advice. Here's how they differ.
  3. Trading Systems & Software

    Steps to Starting Up an Independent Broker Dealer

    Launching your own broker-dealer is a lot of work, but the potential payoff is great, both personally and financially.
  4. Professionals

    How To Answer Option Questions On The Series 7 Exam

    Learn how to answer option questions on the Series 7 exam. Pass your Series 7 exam with the help of these tips.
  5. Professionals

    Series 55

    FINRA Series 55 Exam Guide
  6. Professionals

    Series 62

    FINRA Series 62 Exam Guide
  7. Professionals

    Series 99

    FINRA/NASAA Series 99 Exam Guide
  8. Professionals

    Series 65

    FINRA/NASAA Series 65 Exam Guide
  9. Professionals

    Series 6

    FINRA Series 6 Exam Guide
  10. Professionals

    Series 63

    FINRA/NASAA Series 63 Exam Guide
RELATED TERMS
  1. No results found.
RELATED FAQS
  1. What are the differences between the Series 6 exam and the Series 7 exam?

    The Financial Industry Regulatory Authority (FINRA) offers a variety of licenses that must be obtained before conducting ... Read Full Answer >>
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!