Yield is a figure denoted to a return on investment. Yield is calculated by using the below formula:

Yield= coupon amount/price

The mathematical formula to calculate the yield is the annual coupon amount divided by the current market price of the security.

For example, the price of a bond is Rs.1000 par value with a 10% coupon rate for a period of 10 years.

If the bond is held till maturity the issuer pays 10%(1000)= Rs. 100 every year along with the principal amount on the maturity date.A bond yield is the expected earnings generated and realized on a fixed-income investment over a particular period of time, expressed as a percentage.

The inverse relationship between yield and bond price

Bond price and bond yield fundamentally move in opposite directions. When the interest rate rises the yield on the bonds decreases, this is termed as interest rate risk

If the bond of Rs. 1000 with Rs.100 yield for 10 years is sold in the market in between the face value of the same bond will change. Because bond prices change on a daily basis of prevailing interest rates. Regardless of the market price of the bond, the coupon remains the same.

If the bond is sold at Rs.800 market value then the yield will be (Rs.100/Rs.800)= 12.5%, sold at a discount to face value.

If the bond is sold at Rs.1200 market value, then the yield will be (Rs.100/Rs.1200)=8.33%, sold at a premium to face value.

Bond yield tells investors that higher yields mean the bond investors owe larger interest payments which may be associated with risks. If the investor is willing to take more risk he is under the probability of getting higher returns.

Yield advantage is the difference between two different yields on two different securities issued by the same company. It helps investors to evaluate portfolio decisions. In some cases, it indicates the company’s performance in preserving cash.

Some of the different types of bond yield are:

Running yield- It is calculated by dividing the income from dividends (stocks) or coupons (bonds) by the current market price of the asset.

Nominal yield- It is calculated by dividing all the annual interest payments by the par value of the bond.

Yield to call- It applies to the callable bond. It is a term that refers to the return which bondholder receives if the bond is held until the call date

Yield to worst- It is the lowest possible yield the investor receives on a bond under the worst scenario.

Yield to maturity- It is the yield generated and realized on an investment over a specified period of time.

Bottom line

Bond Yields, Bond prices, and inflation correlate with one another. Variation in short-term interest rates by the central bank will impact bonds with different terms depending on the market expectations of inflation for the future. It is always important to take guidance from experts before making any investment decisions. Bondskart has a team of experts who will help you every step of the way to ensure you make an informed decision.