How to Calculate the Yield of a Bond

Yield is an important piece of information to have when you are comparing a bond to other potential investments. Yield is the rate of return that you get with a bond. What a bond pays and the exact amount you can earn depend on variables such as the bond's price, coupon rate, maturity date and current interest rates.

Instructions

Difficulty: Moderately Easy

Things You’ll Need:

• Maturity date
• Current bond price
• Coupon rate
• Online bond calculator (optional)

Determine What a Bond Will Yield

1. Know the current price of the bond. Bond prices change every day, just as they do for stocks and every other publicly traded security. You don't have to hold a bond until maturity. It can be traded on the public market like other securities.
2. Learn what different types of bond yields mean. You can find a brief explanation at Moneyinstructor.com (see Resources below). There are several ways to calculate the yield of a bond and each will give you a different figure.
3. Know the bond's coupon, or stated interest rate. This is helpful when comparing your current yield to the actual yield you will realize with a potential investment.
4. Get the bond's maturity date and calculate how many years are left until it matures. Knowing the maturity will help you to understand potential gains, even if you do not hold the bond until maturity.
5. Calculate a simple yield by dividing the bond's annual interest rate by the current price of a bond. For example, a bond costing $1,000 that pays $100 a year in interest is 100 divided by 1,000, or a 10 percent yield. If that same bond is priced at $500, its yield goes up to 20%. You are still getting the same $100 a year in interest, but you are paying less for the bond, therefore yielding more of a percentage. This assumes that you bought the bond at par value and held it until maturity.
6. Calculate the yield to maturity using an online calculator at Investopedia (see Resources below). Know that the yield-to-maturity figure includes all interest payments that you would receive until the bond's maturity and assumes that you would reinvest them at the same rate as the current rate.

Tips & Warnings

• Calculate yield-to-maturity instead of other yields when you want to compare several bonds before buying.
• Keep in mind that interest rates in the economy influence a bond more than any other factor.