How to Calculate the Yield on a 5 Year Corporate Bond
Corporate bonds are issued in increments of $1,000, or par, and pay a fixed rate of interest (coupon rate) each year to the bondholder. Upon maturity, the investor is paid back the principal sum of $1,000. The three most common indices used to measure a bond's rate of return are annual yield, current yield and yield to maturity. Yield to maturity is a measure of an investor's real rate of return on an annualized basis that factors in the amount of the discount (below par) or premium (above par) paid and prorates this amount over the life of the bond.
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Things You'll Need
- maturity date
- coupon rate, or the amount of interest paid annually
- purchase price
Instructions
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Determine the bond's yield
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To calculate the annual yield, take the amount of interest paid and divide it by $1,000, or the par amount of the bond. A bond that pays $80 per annum will have an annual yield of 8%, 80 divided by $1,000.
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To calculate the bond's current yield, take the amount of annual interest and divide it by the price paid for the bond. The amount paid for the bond will always be expressed as a percentage of its par value. For example, a bond purchased @98% will cost the investor $980.If an investor paid $980 for the five-year corporate bond and it pays $80 in annual interest, the current yield would be 8.16% ($80 divided by $980). If an investor paid a premium for the bond, for example, 105%, the current yield would be 7.61% ($80 divided by the purchase price of $1,050.
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Determine the bond's yield to maturity. Since the formula used to obtain the yield to maturity is rather complex, go to one of the many online yield to maturity calculator sites, such as moneychimp.com, and simply plug in the variables: maturity, coupon rate and purchase price. In our hypothetical example, our five-year corporate bond with a coupon rate of 8% purchased at a discount of 98%, or $980, has a yield to maturity of 8.508%. The same bond purchased at a premium of 105%, or $1,050, has a yield to maturity of 6.787%. The purchase price will determine whether the yield to maturity is either higher or lower than the bond's current and annual yield.
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References
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