Bond Market Yield in Bond Market parlance actually signifies the Yield to Maturity or YTM, that is, the principal amount or the face value of the bond, that a bondholder is to receive in return if he/she holds the bond to maturity, which is the stipulated time period after which a bond matures.
Bond Market Yield may also include receipts from three probable sources in addition to Yield To Maturity or YTM, which are as follows :
annual coupon interest payments made by the issuer towards the lender (investor)
capital gains (or capital losses) received (or suffered) by the owner of the bond (investor) when the bond is sold
reinvestment of the income received annually on account of coupon interest payments may result in further monetary gains.
Bond Market Yield is technically calculated through the following methods which measure the returns expected from a bond :
Current Bond Market Yield merely links the annual coupon interest payments (made by the issuer) to the market price of a bond and is calculated by dividing the annual coupon interest by the latest price of a bond. To put it mathematically,
Bond Market Yield = Coupon amount / price of a bond.
Yield to Maturity – this type of Bond Market Yield evaluates the final payoff after including the coupon interest payments and the capital gain or loss on the investment. The computation
is done presuming that the investor can reinvest the coupon payments received by him/her at an interest rate equal to the Yield to Maturity.
Yield to Call – this type of Bond Market Yield evaluates the proceeds after including the coupon interest payments and the capital gain or loss on the investment up to the presumed call
date of the debt security (bond).