WHAT IS A BOND YIELD?
Bond yield is the return on capital you receive when you invest in a bond. The yield depends on both the price of the bond and the interest coupon paid on the bond.
However, the value of a bond – which is often referred to as the face value of the bond – can rise or fall dependent on market or economic conditions.
It’s important to note that the higher the value of a bond the lower the yield and vice-versa: bond yields are determined by dividing the coupon by the bond’s market price. Therefore, as a bond price increases, its yield falls.
Here is a straightforward example of how this works:
Taking a £1,000 bond investment with a 10 per cent yield (£100), let’s look at a scenario where the bond price has fallen to £950. If the bond sells today at £950 it is selling at a discount.
Therefore, the current yield is £100 divided by £950 = 0.105. As a percentage this would be 10.5 per cent.
Should the price of the bond increase to £1,050, the current yield becomes £100 divided by £1,050 = 0.095. Which as a percentage would be 9.5 percent.