In the Bond Market idiom,
Bond Yield may be defined as the rate of interest that is paid by the company issuing bonds to the owner of a particular bond. The Bond Yield for any specific bond, is commonly determined by dividing the effective coupon rate of a bond by its current market price.
The Bond Markets function in a manner that the Coupon Rate or rather the Coupon payments for every particular type of bond that is issued in the Bond Market, is fixed. Which implies that irrespective of the current market prices of the bonds in the Bond Market, the payments received by each particular bond remains the same or constant.
As a result of the above, the Bond Yield, as a rule, is expressed as a percentage on the face value of the particular bond. The Bond Yield discussed here, usually refers to the Coupon Yield or Nominal Yield.
The Bond Yield can also be calculated following other methods of calculation, which are discussed in details, in the following lines. The Bond Yield begotten from the Bond Markets are also calculated as follows :
- Coupon Yield or Nominal Yield
- Current Yield
- Yield To Maturity or YTM
Coupon Yield or Nominal Yield, is also referred to as the Coupon Rate in the Bond Market parlance. As already mentioned above, this type of Bond Yield is calculated at the end of a financial year and is paid as a fixed coupon amount on the original face value of the particular bond. However, this Bond Yield is expressed as a percentage on the face value of the Bond.
Current Yield, in contrast to the Coupon Yield or Nominal Yield, is a Bond Yield that is determined by dividing the fixed coupon amount (that is paid as a percentage on the face or original value of the specific bond) by the current price value of the particular bond. In other words, Current Bond Yield = Coupon amount / current price of a bond.
The difference between these two Bond Yields (that is, Current Yield and Coupon Yield) is that in one where the coupon payment in divided by the face value of the bond, in the other method, the same amount that is paid annually by the issuer to the bond owner, is divided by the current market price of the bond.
Yield To Maturity or YTM is generally calculated at the end of the term for which the bond was issued in the Bond Market. This type of a Bond Yield is calculated taking into account the eventual payment made by the company, which had issued the Bond in the first place, to the owner of the bond. Also taken into account, are the annual coupon interest payments made by the issuer together with the capital gain earned or the capital loss suffered by the lender (that is,the investor) on the investment. The calculation is carried out taking for granted that the investor (or the lender of the capital sum) can reinvest the coupon payments received, at an interest rate which equal to the Bond Yield named Yield to Maturity.