How to Find a Current Yield on a Bond
Unlike savings accounts or certificates of deposit (CDs), bonds don’t have a predetermined interest rate. The interest rate, or yield, changes as the bond’s price rises or falls. In order to find a current yield of a bond, you have to know the current price. Follow the steps below to find a current yield, and decide if it’s a good rate under prevailing market conditions.
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Instructions
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Learn how bonds differ from other financial investments. When a company or government issues bonds, it borrows money which will be repaid to the person owning the bond when it matures. Maturities vary widely, from less than a year to 30 years or even longer. Corporate bonds usually have a face value of $1000—this is the amount that must be repaid at maturity. Each bond also has a coupon rate. This is a set amount of money that is paid to the bondholder each year (most often in two semiannual payments). For example, a $1000 corporate bond might have a coupon rate of $100. The bondholders will receive that amount each year they hold the bond. However, bonds are traded much as stocks are, and their prices rise and fall depending on market conditions. Prices are rarely the same as the face value.
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Find the coupon rate of the bond. Coupon rates are usually listed along with the daily price quotes for bonds, which can be found by looking in the bond market listings in newspapers or on online financial websites. Alternatively, if you have a bond, this coupon rate will be listed on the bond.
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Check online listings or the newspaper to find the daily (current) price of a bond. You might see the price of a bond listed as 85.50. This is not the price in dollars. Rather, it is the price expressed as a percentage of the face value of the bond. For a $1000 bond, this price listing means the current bond price is 85.5 percent of the face value, or $855.00.
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Find a current yield of a bond. To do this, simply divide the coupon rate by the current price of the bond. Express the result as a percentage by multiplying it by 100. In practice, most people simply use a bond yield calculator. This is a software tool that does the calculation. There are several good bond yield calculators available on the Internet. A link to the Morningstar bond yield calculator appears in the Resources section below.
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Determine how the current bond yield compares with the return on other interest-paying investments. Usually you want to see if a current yield of a bond compares well with the prevailing interest rates. Be aware that when interest rates rise, bond prices will probably fall, so the lower price results in a higher yield for the bond. Conversely, when interest rates fall, bond prices will usually rise. Although prevailing interest rates are not the only factor that affects bond prices, it is one of the most important.
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