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What is a Bond Yield?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 21 August 2016
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The bond yield is essentially the amount or percentage of return that an investor can anticipate to receive from a bond issue within a specified period of time. It is important to note that calculating this involves making use of current data regarding the current price of the bond rather than the price at the time of purchase. Determining the current status of the bond yield also requires understanding the current annual coupon associated with the bond. The calculation also usually assumes that the buyer will hold onto the bond for at least a period of one year.

A simple formula for calculating a bond yield involves dividing the annual coupon by the price of the bond. As an example, if the bond were priced at $100.00 US Dollars (USD) with an annual coupon of $6.00 USD, the bond yield would be projected at six percent. However, this yield assumes that there will be no change in the price and that the buyer will hold onto the bond for at least one year.

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If there is a change in interest rates that leads to a shift in the current price of the bond, the bond yield may indicate a capital loss. Using the same example, if the price of the bond fell to $90.00 USD, this would result in a loss of $10.00 USD, which is partially offset by the coupon of $6.00 USD. However, a capital loss of $4.00 USD for the annual period still remains. By the same token, an upward shift in the price of the bond would increase the capital gains realized from the investment.

Understanding how the bond yield functions is important for investors. By evaluating the factors that are likely to influence the future worth of the bond issue, investors can determine if it is in their best interests to purchase the bond and hold onto it for at least a year. If the projections indicate the bond is highly likely to produce a decent gain for one or two years, the investor may choose to purchase the issue. However, if there are indications the bond will drop in value over that first year, that means the investor would probably not be able to sell the bond for enough to break even, much less make a profit on the investment. In that situation, the investor would be well advised to look into other bonds or go with entirely different investment opportunities.

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BrickBack
Post 3

Suntan12- I have been meaning to look into municipal bonds, but I know that you need a broker that specializes in these bonds.

I know that Cantor Fitzgerald specializes in bonds, but they do not have a location near me. I also know that many Chase branches also sell municipal bonds to their customers and many licensed bankers are able to do so. I am really interested in this type of high yield bond.

suntan12
Post 2

Cupcake15-If you want more information on the bond market yield it is a good idea to take a look at the site called Bankrate.

Bankrate offers a variety of information regarding bond yields and even includes a bond yield calculator.

The best thing to remember is that a bond yield rate is inversely related to the current interest rates, so if interest rates are low, then bond prices are generally higher.

I know that a lot of people are buying Treasury bonds. They are looking at the Treasury bond yield and realizing that it is much higher than a typical CD so many people are turning to these investments in order to keep their money safe and earn a higher return on their money.

cupcake15
Post 1

The municipal bond yield usually ranges from 4% to about 6%. Municipal bonds are great because the income generated is tax free.

For example, if you have $1,000,000 in municipal bonds at a bond yield rate of 5% then you would receive income of $25,000 every six months tax free.

This is why a lot of high income earners generally invest in these types of investment products. The income is offered until the bond reaches maturity.

Some municipal bonds mature in ten years and others in thirty years. Also, these high yield bonds vary in degree of volatility. For example an AAA rated governmental obligation municipal bond may not have as high of a yield as

a revenue municipal bond but they are safer investments.

Also municipal bonds invest in various states, so it may make more sense to invest in a state like Texas that is financially sound than a state like California that is financially troubled.

These high yield bonds all have a rating so it is important to take that into consideration before you buy a municipal bond. The income that you receive from the bond yield to maturity makes the municipal bond an attractive investment.

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