Bond Yield
Tue, Apr 15A bond yield represents the annual interest amount you earn from a bond, expressed as a percentage of the bond's initial price. It serves as the compensation that investors receive for holding government or corporate debt.
Bond yield is utilized to assess the potential returns of various types of bonds. Essentially, a bond acts as a loan, functioning similarly to how a local bank charges interest on the loans it provides to borrowers.
Traders closely monitor bond yields as they indicate investor confidence. When demand for a bond is low, its yields increase to entice more buyers. Conversely, lower bond yields generally suggest strong demand from investors, either due to their confidence in receiving repayment at maturity or because they view it as a secure place to invest their assets.
The interest rate paid by the bond issuer is referred to as the coupon, which remains fixed, while the yield fluctuates based on the bond's market price. For instance, if you purchase a bond for $100 with a 5% interest rate, your yield will be 5%. However, if you acquire the same bond for $88, the yield would be approximately 5.7%. This value is known as the current yield and is primarily used by investors for bond comparisons.
There are additional types of bond yield to consider. Nominal yield is calculated by dividing the interest paid by the bond's face (original) value. Yield to maturity indicates the average yield you can expect from a bond if you hold it until it matures.
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