What is Bond Yield?

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.