How to Compute Bond Yields
Whether you are purchasing bonds as a first time investor or a seasoned professional broker, it is essential to know a bond's yield. By using information such as the bond's coupon payment, face value and current price, you can quickly and easily calculate a bond's yield. This value can help you determine which bonds to buy on the open market for investing.
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Instructions
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Note that a bond's face value is $1,000 in most cases. Bonds are loans to a company or government with the promise of $1,000 paid back by the company or government at maturity. Bonds are long term investments, with many of them having a 30-year maturity. If bought in the year 2000, you would earn your bond yield to maturity percentage in 2030. The current yield is what the bond pays at that date in time based on the current coupon rate and the asking price of the bond.
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Remember the price that you paid for the bond. Many bonds are priced below face value to entice buyers to invest. The price paid is also based on risk that the company will go bankrupt. Government bonds have lower yields due to the unlikelihood that they will go bankrupt. The price you pay is just one factor that will help you determine a bond's yield.
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Note the coupon rate. This is the percentage you receive in semi-annual payments as a form of interest. If the coupon rate is 7 percent, you will receive $70 as a payment for holding onto the bond. Often, you will receive two payments of $35 in a year. This money is in addition to any money you would receive above and beyond the original price of the bond. If you paid $950 for a 30-year bond with a 5 percent coupon rate, you receive $50 per year as a semi-annual payment and you would also receive $50 more than what you paid for the bond at maturity.
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Calculate current yield by dividing the current coupon rate by the price of the bond. Bond prices are noted as percentages of face value. If a bond price is listed at 95, it will cost you 95 percent of $1,000, or $950. In step 3, if the price of the bond is $950 and the coupon rate is 7 percent, the current yield would be 7.37 percent, but if the bond was selling at a premium for $1,025, which is above its face value, the current yield for that same bond would be 6.83 percent.
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