What is Bond Yield?
Definition
Bond yield is the return an investor earns from holding a bond, expressed as an annual percentage. The most common measure is yield to maturity (YTM), which accounts for the bond's coupon payments, price, par value, and time remaining until maturity.
Detailed Explanation
Bond yield and bond price have an inverse relationship — when yields rise, bond prices fall, and vice versa. This is because existing bonds with lower coupon rates become less attractive when new bonds offer higher yields, so their price must drop to offer a competitive yield. A bond with a 3% coupon loses value when comparable new bonds offer 5%.
The 10-year Treasury yield is the single most important benchmark in finance. It serves as the risk-free rate for DCF models, influences mortgage rates (which are typically 150-200 basis points above the 10-year), and acts as a key input in the equity risk premium calculation. When the 10-year yield rises, stock valuations typically compress.
Yield measures include: current yield (annual coupon / market price), yield to maturity (total return if held to maturity), yield to call (return if called early), and yield to worst (lowest of all possible yields). For most analysis, YTM is the standard measure as it accounts for both coupon income and capital gain or loss at maturity.
Credit spreads — the difference between corporate bond yields and Treasury yields of the same maturity — indicate the market's perception of credit risk. Investment-grade spreads of 100-150 basis points indicate a healthy credit environment. Spreads widening to 300+ basis points signal stress and often precede equity market declines.
Formula
Current Yield = Annual Coupon Payment / Bond Market Price x 100; YTM requires solving for the discount rate that equates the present value of all cash flows to the current priceExample
A bond with a $50 annual coupon and $1,000 par value trading at $950 has a current yield of 5.26% ($50/$950). Its YTM would be higher (approximately 5.6%) because you also gain $50 at maturity.
Frequently Asked Questions
Why do bond yields matter for stock investors?
What moves bond yields?
Related Terms
Yield Curve
The yield curve is a graph plotting bond yields across different maturities, from short-term (3 months) to long-term (30 years). A normal curve slopes upward, an inverted curve slopes downward, and inversions have preceded every U.S. recession since 1955.
Credit Rating
A credit rating is an assessment by a rating agency (S&P, Moody's, Fitch) of a borrower's ability to repay debt. Ratings range from AAA (highest quality) to D (default), with investment grade (BBB- or above) and speculative grade (BB+ or below) as the key dividing line.
Treasury Bonds
Treasury bonds (T-bonds) are long-term debt securities issued by the U.S. government with maturities of 20 or 30 years. They are considered the safest investment available, backed by the full faith and credit of the U.S. government, and serve as the global benchmark for risk-free returns.
Federal Funds Rate
The federal funds rate is the interest rate at which banks lend reserve balances to each other overnight, set as a target range by the Federal Reserve's FOMC. It is the most influential interest rate in the world, affecting everything from mortgage rates to stock valuations to global capital flows.
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Disclaimer: The information on this page is provided for educational and informational purposes only and does not constitute investment advice. AI-generated analysis may contain errors or inaccuracies. Always conduct your own research and consult a qualified financial advisor before making investment decisions.
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