Definition
Bond Yield represents the return an investor earns by holding a bond. It accounts for interest payments and the bond's current price, and can be expressed as:
- Current Yield: Annual interest divided by the bond's price.
- Yield to Maturity (YTM): Total return if held until maturity, including interest and price change.
- Yield to Call (YTC): Return if the bond is redeemed early at a call date.
Why It Matters
Bond yield is crucial for investors because it determines the income generated from fixed-income securities and helps compare returns across different bonds. It also affects borrowing costs for governments and corporations, influencing broader financial markets and interest rates.
Example
If an investor buys a $1,000 bond paying $50 annually in interest, the current yield is 5%. If the bond is purchased at a discount or premium, the yield to maturity may be higher or lower, reflecting the total return over the bond's life.