What Is a Bond Yield?

A bond yield is the interest percentage you receive from a bond. Thus, the greater the yield, the more money you'll receive through interest payments. However, a high yield does not always signify a good investment. With a higher yield usually comes with a higher risk of default.

The Facts

There are three different parts of a bond yield: the coupon, which is the interest rate of a bond when it's issued; the current yield, the interest percentage of the current price of the bond; and the yield to maturity, an estimate of the amount you will receive if the bond is held to its maturity date.

Types

Different types of bond yields affect the amount of return you will receive. One type is an annual percentage yield, which is an annual interest rate that also takes compounding interest into account.
Another type is a high-yield bond, which has a lower credit rating than other types of bonds, such as Treasury and municipal bonds. This bond yield fluctuates depending on the state of the economy and other events. It can be a risky endeavor, but the bond yield can be higher than with other types of bonds.

Time Frame

Bond yield return typically depends on how long the bond is held. The maturity date of the bond affects the return from the bond yield a great deal. You can predict the amount of yield you will receive from a specific bond by using a business calculator.

Misconceptions

Most people believe that bonds are risk-free investments. However, bonds come with the risk of default, when the company can no longer pay the interest payments and the face value of the bond. Every bond comes with a credit rating, which helps estimate the bond's default risk; the better the rating, the lower the risk.
The exception is Treasury bonds, which are thought to have no default risk because the U.S. Government has never defaulted. However, state-issued bonds, called municipal bonds, do have some history of defaulting.

Potential

The stock market may have produced a higher return on investment, you can make a significant profit from bond yields, depending on the amount of risk involved. For example, corporate bonds will yield a higher percentage than government bonds, and bonds with a longer date until maturity will yield a greater percentage than short-term bonds.
Most investors have both stocks and bonds in their portfolios.