Bond Yields

A bond is also a type of investment where in a loan is in the form of security. This type of security has two things one is face value and the second one is interest rate. It is a contract between the issuer and the bond holder to pay a certain amount of money in the future which includes both the principle amount and the interest rate.

The bond yield is nothing but the rate at which the bond yields to the bond holder. This tern bond yield includes the interest rate, maturity period, and the initial purchase price of the bond. Bond yield also includes the value that the capital gets as a return due to the investment in the bond.

Different types of bond yield are,

• Current yield: it calculates the percentage of the return that bond yields annually. It calculates the percentage of the rupee on the coupon which the investor pays on the bond. It can be calculated by dividing the bond coupon by its market price.  

• Coupon yield is the annual interest rate that was established when the bond was issued by the issuer to the bond holder.  

• Yield to maturity is the amount that the investor gets at the completion of the investment process. In other word the total amount that the investor will get after the completion of the maturity period from the issuer.  

• Yield to call is interest that the bond holder gets if he/she holds the bond till the call date. The call date is nothing but date a before maturity date after which the issuer can redeem the bond. In this case the bond will be redeemed either at the par value or at a value higher than the par value.

• Yield to worst is nothing but the lowest interest rate that the holder will definitely get upon the maturity or call date. It is primarily calculated by the investor to analyze the worst case scenario. The higher this rate the better is the investment.

It must be known that the interest rates of these bonds are fixed. The bonds value in the market fluctuates along with the interest rate of the banks cause of this property of bond. When the interest rate of the banks increases the bond rate decreases whereas it is the reverse for the decrease in interest rate.

Questions:

• Define bond yield
• What are the various types of bond yield calculation?