Bond Yield

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What is a 'Bond Yield'

A bond yield is the amount of return an investor will realize on a bond. Though several types of bond yields can be calculated, nominal yield is the most common. This is calculated by dividing amount of interest paid by the face value. Current yield is calculated by dividing the amount of interest it pays by current market price of the bond.

BREAKING DOWN 'Bond Yield'

The yield of a bond is inverse to its price: as bond prices increase, bond yields fall. For example, assume that an investor purchases a bond with a 10% annual coupon and a par value of $1,000. The yield on this bond would be its par value divided by the interest it pays. The interest would be $100 (10% of $1000), making its yield $100/$1000 = 10%. If the bond price were to fall to $900, the yield would become $100/$900 = 11.1%. The investor will still receive the same amount of interest, since the interest is based on the bond’s par value, but would have a higher yield because the bond price fell.

Investors may see bond yields fall when economic conditions push markets toward “safer” investments. Economic conditions that might decrease bond yields include high rates of unemployment and slow economic growth (or recession).

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