What is Bond Yield Formula?

Calculate Bond Yield

Let us understand the bond yield equation under the current yield in detail.

Bond Yield Formula = Annual Coupon Payment / Bond Price

  • Bond Prices and Bond Yield have an inverse relationshipWhen bond price increases, bond yield decreases.When bond price decreases, bond yield increases.

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Bond Yield Formula (wallstreetmojo.com)

Examples of Bond Yield Calculation

Let’s see some simple to advanced practical examples of the bond yield equation to understand it better.

Example #1

Suppose a bond has a face value of $1300. And the interest promised to pay (coupon rated) is 6%. Find the bond yield if the bond price is $1600.

  • Face Value = $1300Coupon Rate = 6%Bond Price = $1600

Solution:

Here we must understand that this calculation completely depends on the annual coupon and bond price. It completely ignores the time value of money, frequency of payment, and amount value at maturity.

Step 1: Calculation of the coupon payment annual payment

Annual Coupon Payment = Face Value * Coupon Rate

  • =$1300*6%Annual Coupon Payment =$78

Step 2: Calculation of bond yield

Bond Yield = Annual Coupon Payment/Bond Price

  • =$78/$1600

Bond Yield will be –

  • =0.04875 we have considered in percentages by multiplying with 100’s=0.048*100Bond Yield =4.875%

Here we have to say that increased bond prices result in decreased bond yield.

Example #2

If a bond has a face value of $1000 and its prices $970 now and the coupon rate is 5%, find the bond yield.

  • Face Value =$1000Coupon Rate=5%Bond Price = $970

Here we must understand that this calculation completely depends on the annual coupon and bond price. It completely ignores the time value of moneyTime Value Of MoneyThe Time Value of Money (TVM) principle states that money received in the present is of higher worth than money received in the future because money received now can be invested and used to generate cash flows to the enterprise in the future in the form of interest or from future investment appreciation and reinvestment.read more, frequency of payment, and amount value at the time of maturity.

Step 1: Calculation of the coupon payment Annual Payment

  • =$1000*5%Annual Payment =$50

  • =$50/$970

  • =0.052*100Bond Yield =5.2%

Hence it is clear that if bond price decreases, bond yield increases.

This has been a guide to Bond Yield Formula. Here we discuss how to calculate bond yield along with practical examples and a downloadable excel template. You can learn more about financial analysis from the following articles –

  • Types – High Yield BondsTypes - High Yield BondsHigh yield bonds are bonds that pay higher interest than others but are assigned lower credit ratings by popular credit rating agencies. Ratings below “BBB” from Standard & Poor and below “Baa” from Moody’s are due to additional credit risks involved in interest and principal repayment.read moreThe formula of Days Payable OutstandingThe formula of Bond Equivalent YieldThe Formula Of Bond Equivalent YieldThe formula calculates the bond equivalent yield by ascertaining the difference between the bond’s nominal or face value and purchase price. These results must be divided by their price, and these results must be multiplied by 365 and then divided by the remaining days left until the maturity date.read moreBond Formula