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Markets & Instruments

What Is a Bond Yield

A bond is a tradeable piece of a loan that pays a fixed coupon each year, and its yield is that coupon divided by what the bond costs today, so that a falling price means a rising yield by plain division. This paper shows what a bond promises, how the same coupon gives three yields at three prices, why each length of loan has its own yield and the 10-year is the one quoted, and how a yield appears as a percent on a charting site and as a bond price on a broker. After reading it you can work a yield out from a coupon and a price, and read a yield chart or a bond CFD row knowing which way each moves.

Difficulty
Advanced
Reading time
5 min
Pages
8
Reviewed by
Saman Rahbar

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A bond yield, in five lines

A bond is a loan to a government or a company, cut into pieces that trade, and each piece pays a fixed sum every year, called the coupon: 40 dollars a year on a 1,000-dollar bond at 4 percent, in this paper's example. The yield is that fixed coupon divided by what the bond costs today. At a price of 950 the same 40 dollars is 4.21 percent; at 1,050 it is 3.81. So the rule is arithmetic: price down, yield up, and price up, yield down. The yield the news means is the 10-year government bond's. The figures here are examples, since this library holds no bond bars.

A bond with coupons

Picture a bond as it used to be printed: a certificate for the loan, 1,000 dollars paid back on the last day, with coupons along the edge, one to clip and cash each year, 40 dollars each here. The word coupon survives from that edge. The bond promises two things, the coupons each year and the 1,000 at the end, and both are fixed the day it is printed. What is not fixed is what a buyer pays for the certificate later, and that is where the yield comes from.

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