How to Understand Bond Yield Rates Vs. Maturity Rates
A bond yield rate and a maturity rate are not separate concepts, but tie in with each other to give you the full value of a bond. Knowing these rates allows you to compare multiple bonds, ensuring you invest as wisely as possible. Always obtain these values before you go forward with either buying or selling a bond.
Other People Are Reading
Instructions
-
-
1
Understand that a "bond yield rate" is your annual return on your bond, expressed as a percentage. In theory, the longer you hold a bond, the higher your yield rate over time. That is because you take on more risk for holding the bond longer.
-
2
Know how to calculate your bond yield rate. First of all, if you buy a bond, your yield rate would equal the bond's coupon rate, or interest rate. For example, if you purchase a bond with a 5% coupon rate that has a par value of $500 (the amount the seller pays you back at the maturity date), your yield rate is 5% (which amounts to $25.00 per year).
-
-
3
Know that if your par value changes, your yield changes accordingly. That means you get more yield if your par value lowers, and less yield if your par value increases. For instance, if your par value decreases to $300, your yield increases to 8.3%--giving you more yield per year, but a reduced value paid to you at your bond's maturity date.
-
4
Know that a maturity rate is actually the "yield-to-maturity rate." The yield-to-maturity rate is the annual rate of your bond if you hold it to its maturity date. It differes from yield rate because if you hold a bond to maturity, the yield will usually increase per year (a concept called the "yield curve").
-
5
Understand that investors distinguish between yield rates and yield-to-maturity rates because many people choose to sell their bonds before they reach maturity. Investors often sell bonds when the bond's purchase value reaches a higher price (so they can sell it at a higher purchase price), while they choose to hold onto bonds when the yield rate or the par value climbs.
-
6
Use an online calculator to find out your bond's yield-to-maturity rate. You could use a complicated formula to do this on your own, but it is much easier to use an online calculator (see the third link below).
-
1
Tips & Warnings
Know that if overall interest rates are low in the economy, bond coupon rates will be low as well. Bonds are just as privy to economic fluctuations as are stocks. When in doubt, always ask your broker for his input on your bond.
