bond return vs bond yield?

Question

Hi, can anyone help me...
I'd like to know the difference between a bond return and a bond yield. How can I compute a bond return? If I'm interested in the return and not in the yield...

Thanks for your time guys.

P.N.

Answer 1

There is a lot of misinformation in the posts above.

Someone said that the yield of a bond is the interest rate that the issuer pays. This is incorrect -- that is the coupon rate.

Someone else said that the yield of the bond is equal to the interest paid in one year divided by the price -- this is also incorrect. That is something called "current yield" which is not related to the yield of the bond.

The yield of a bond is an Internal Rate of Return (IRR). If you look at all the cash flows of the bond and calculate their present value using the yield, then the sum of those present values is equal to the cost of the bond (price plus accrued interest).

Another way of stating it is that if you hold onto the bond until it matures and are always able to reinvest at the yield, then your annual return will be equal to your yield.

OK -- you also asked about return. When we talk about the return on a bond, we need to specify a time horizon. For example, we might want to know the return on a bond in the last year. To find this, we need to know the value of the bond at the start of the period. We then add the change in bond value (capital gain or loss) to the interest that was paid. We divide that by the starting value. That is the bond's return for the year. For example, suppose that a year ago the bond was worth 99% of the face value. Suppose it is now worth 100.5%. Suppose that it paid a coupon of 6%. Our earnings are 6% plus the 1.5% capital gains. This is 7.5%, We divide this by the original price of 99. We get a return of 7.576%. Some people may also include the interest on reinvesting the coupon payments.

In short, the yield is the return you can expect to get if you hold onto the bond and can reinvest at the current rate. A bond return is the actual percent gain or loss in a holding period.

Answer 2

Return Vs Yield

Answer 3

Yield Vs Return

Answer 4

When a bond is 'created' rules are established, such as the length of the bond (1,5,10 years) and the interest paid each 6 months (2%, 5%, 12%). The yield is determined based on these rules.

Different factors can also change the value of a bond. A risky bond needs to pay a higher interest every year. But if the bond becomes less risky (a corporate bond when the company becomes more profitable) then the bond increases in value. The yield is still the same, but you can sell the bond for more than you paid for it. This can increase the return.

The same is true when a bond becomes more risky. Business is bad. The bond will lose value and the return will be less.

Answer 5

The yield of the bond is the interest rate divided by the cost. So a bond maturing at $1,000 paying 6% which costs $800 has a yield of 7.5%.

The bond return is more of a result than something that can be predicted. The return will equal the yield if the bond is held to maturity. A discount bond like the example above will increase in value gradually as the maturity date approaches. The return will be more or less than the yield depending on the sale price of the bond.

Generally, if the prevailing interest rates drop after the bond is purchased it will provide a higher overall return once you sell it because your bond increases in value since its interest rate is fixed and now relatively high. The opposite happens if rates rise, as your bond becomes less attractive than competing investments.

Answer 6

Bond yield is just how much the bond is currently paying per year (i.e. 7.5%)


Bond yield to maturity, is the same as bond return. Essentially, it will tell you how much you will earn as an annual percentage until the bond matures. This is because you can buy a bond for less than par value.


The calculation for yield to maturity is complex because it involves using the time value of money. You will need a business calculator, or perhaps find one online.

Good luck!

Answer 7

This Site Might Help You.

RE:
bond return vs bond yield?
Hi, can anyone help me...
I'd like to know the difference between a bond return and a bond yield. How can I compute a bond return? If I'm interested in the return and not in the yield...

Thanks for your time guys.

P.N.

Answer 8

Bonds(interest bearing securities) all have a maturity date when they come due because they are debt instruments. The yield(amount at maturity)is what the bond pays the lender at due(end) date in total interest. The rate is the annual interest earned on the bond. Adding interest to principal (say each year) raises yield above the rate.

Answer 9

There is a site where you can calculate the return based on the current price of the bond. Actully the yield to maturity is the return.

Here is a handy dandy calculator

http://www.moneychimp.com/calculator/bond_yield_calculator.htm

Answer 10

Yield expresses the relationship between dividend payment and share value. Total return includes dividends paid and change in principal (share value).