A:

When investors buy bonds, they are essentially lending money to bond issuers. In return, bond issuers agree to pay investors interest throughout the lifetime of the bond and repay the face value upon maturity. The money that investors earn through interest is called yield. Many times this yield is positive, but there are certain circumstances where the yield can also be negative.

## The Meaning of a Negative Bond Yield

If a bond has a negative yield, it means the bondholder loses money on the investment, although this is an uncommon occurrence. Whether a bond has a negative yield largely depends on the type of yield being calculated.

Depending on the purposes of the calculation, a bond's yield can be determined using the current yield or yield-to-maturity (YTM) formulas.

### Current Yield

The current yield of a bond is a simple formula used to determine the amount of interest paid annually relative to the current selling price. To calculate, simply divide the annual coupon payment by the bond's selling price.

For example, assume a \$1,000 bond has a coupon rate of seven percent and is currently selling for \$700. Since the bond pays \$70 annually in interest, the current yield is 10 percent.

Using this formula, it is nearly impossible for a bond to have a negative yield. Even if the price is substantially above par, a bond that pays any interest at all will always have a positive current yield. For a bond to have a negative current yield, it has to pay negative interest.

### Yield to Maturity

The YTM calculation is a more comprehensive yield formula because it incorporates the financial impact of the bond's selling price and par value. A bond's par value is the amount the issuing entity must pay the bondholder at maturity. A bond's YTM, therefore, represents the rate of return an investor can expect if the bond is held until it matures.

Since the YTM calculation incorporates the payout upon maturity, the bond has to generate a negative total return to have a negative yield. For the YTM to be negative, a premium bond has to sell for a price so far above par that all its future coupon payments could not sufficiently outweigh the initial investment.

For example, the bond in the above example has a YTM of 16.207 percent. If it sold for \$1,650 instead, its YTM plummets to -4.354 percent.

RELATED FAQS
1. ### What is the difference between yield to maturity and the spot rate?

Find out how yield to maturity and spot rate calculations use different discount rates to determine the present market value ... Read Answer >>
2. ### How do I use the holding period return yield to evaluate my bond portfolio?

Find out how to use the holding period return yield formula to evaluate the performance of bonds in your portfolio, and view ... Read Answer >>
3. ### When is a bond's coupon rate and yield to maturity the same?

Find out when a bond's yield to maturity is equal to its coupon rate, and learn about the components of bonds and how they ... Read Answer >>
Related Articles
1. 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.
2. Investing

### Understanding Interest Rates, Inflation And Bonds

Get to know the relationships that determine a bond's price and its payout.
3. 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.
4. Managing Wealth

### How Bond Prices and Yields Work

Understanding bond prices and yields can help any investor in any market.
5. Investing

### Comparing Yield To Maturity And The Coupon Rate

Investors base investing decisions and strategies on yield to maturity more so than coupon rates.
6. Investing

### Why Investors Should Use Duration to Compare Bonds

Duration is a helpful metric that determines a bond's sensitivity to interest rates.
7. Investing

### Corporate Bond Basics: Learn to Invest

Understand the basics of corporate bonds to increase your chances of positive returns.
8. Investing

### The Basics Of Bonds

Bonds play an important part in your portfolio as you age; learning about them makes good financial sense.
9. Investing

### How Rising Interest Rates and Inflation Affect Bonds

Understand bonds better with these four basic factors.
RELATED TERMS
1. ### Bond Yield

Bond yield is the amount of return an investor will realize on ...
2. ### Discount Bond

A discount bond is a bond that is issued for less than its par ...
3. ### Bond Valuation

Bond valuation is a technique for determining the theoretical ...
4. ### Breakeven Yield

The breakeven yield is the yield required to cover the cost of ...
5. ### Below Par

Below par is a term describing a bond whose market price is below ...
6. ### Minimum Yield

Minimum yield is the lesser of a bond's yield-to-call and yield-to-maturity, ...