A bond yield is the annual interest rate that a bond issuer promises to pay its bondholders, expressed as a percentage of the face value. It’s calculated by dividing the amount of money paid at maturity (the face value) by the current price of the bond.

Bond yields are usually higher than savings account or CD rates because bonds are considered riskier given their looser terms and conditions, which include no guarantee of principal. Bond prices move inversely with their yields – when yields go up, prices go down, and vice versa. Yields are also influenced by other factors such as market volatility, supply/demand trends for specific bonds in the marketplace, inflation expectations and changes in prevailing interest rates. The U.S. bond market is the largest and most liquid in the world, so any major events here can have a far-reaching impact on the global yield curve.

As you can see, because bonds are traded both on exchanges and in the secondary markets between investors, there’s no single value for yields at any given time – especially since not all bonds trade frequently. To calculate an individual bond’s yield to maturity (YTM), use this formula: Yield to Maturity = Total Return/Current Price.

The current price of a bond can be found either through your broker or online sources such as Bloomberg . To find the yield required to attain a target price, use this formula: Desired Price = Current Price/(1+Yield Required).

What is a bond’s Yield to Call?

When a bond has a call provision, the issuer can redeem the bond at par before its stated maturity date. On this type of security, yield to call (YTC) will be higher than the standard YTC because it factors in the expectation that the bond could be redeemed at any time. To find an individual bond’s YTC, use this formula: Yield to Call = [Desired Price – (Current Price x Par Value)]/(Current Price x Par Value + Redemption Amount).

What is a Floating-Rate Bond and How Does It Work?

A floating-rate bond pays interest periodically that’s based on a benchmark rate such as LIBOR or Fed funds rates. Yields on these types of bonds fluctuate with changes in the benchmark rate, which is usually calculated daily. Floating-rate securities are less sensitive to interest rates than fixed-rate debt because their payments change along with market conditions.

How to Calculate Bond Yield?

You can find bond yields easily online – for example, the U.S. Treasury Department offers a complete list of yields for T-notes and T-bonds . To calculate an individual bond’s yield, you have two main options: use a finance calculator or use Excel . Both methods are illustrated below using this 10% coupon bond trading at par ($100) with its face value received at maturity (the same as the price).

How does the Canadian 5-year bond yield compare to other countries?

In fact, Canada has a very high bond yield compared to other countries. The spread between Canada and the US is enormous while it’s relatively low when comparing Canada to Germany or Switzerland. We could just keep our money in the bank, that would be safe after all! Low risk also means low return. You have to wonder what’s wrong with this picture? Why should our government borrow money at almost 0% while they can get so much more from us? Well, there are several answers to this question but let’s explore one of them here. It comes back to moral hazard every single time! Let me explain…

There are many risks involved in lending money to individuals or corporations, especially if you’re an outsider lender which is usually the case. You have to check the credit risk, the penalty for late payment, legal risks and you also need to know what’s happening with your borrower. The more complex it is, the less likely you are to lend money which makes borrowing difficult and costly .

On top of that we usually want a higher return when we lend our hard earned money than the one we get from keeping it in a bank account so this overshadows all other aspects which would make lending an attractive business proposition. Some decades ago though, borrowers found a loophole they could exploit by taking advantage of moral hazard: lenders didn’t need to know what their money was used for as long as they got paid back on time! When defaults occurred, borrowers were insured against such shameful behaviour by the government which made this kind of lending very popular among those who wanted to make money fast and were ready to take on some risk. They didn’t care if they were financing million dollar yachts as long as they got their money back each month and then some! As a result, we ended up with all kinds of financial products over-indulging in moral hazard: credit cards, payday loans, student loan etc…

During good times, such lending provides liquidity to borrowers at an affordable price which is always welcome; it also brings down the cost of borrowing for everyone else because lenders compete for business. Governments like them because they create jobs and people spend more when they can borrow money for purchases that would normally be out of their reach. However, such lending always comes with a cost and it usually transfers most of the risk to lenders…

And this is how we ended up in the middle of this housing bubble without knowing it! Borrowers were happily taking advantage of easy credit to buy houses while lenders were equally happy because they could offload some of them through secondary market sales or repackaged mortgages which would become popular during following years. Of course everyone knew there was no free lunch, but when you’re used to someone else paying your bills for you, well let’s just say that you get comfortable pretty fast! Although borrowing has its costs, borrowers are usually more aware about them than lenders are. At least I hope so!

What are some of the pros and cons of investing in bonds?

Well, just like any other investment, investing in bonds is mostly about managing risk. Bonds come with a safety net which makes them almost as safe as your bank account but they don’t pay you much so the returns aren’t that great either. They are also less liquid than stocks so if you need quick cash, this isn’t your best option.

Bonds have at least two sources of return: interest payments and capital gains/losses . Let’s explain by taking the example of a bond worth 100$ maturing after 5 years that pays 5% yearly or 5$ each year . If it increases to 110$ by maturity , then the annual yield on this investment would be 10%. We’re not including transaction costs here because I’m focusing on simple cases.

During the first year, 10$ would be paid out in interest and at the same time, 5$ would be received from selling a bond paying 5% so we have a total of 15$ resulting from selling existing bonds. After that, there’s no other income except for capital gains/losses so if we re-invest all our money in buying new bonds that pay 5%, then during year 2 we will only get 25$. This is because when you buy a bond paying 5%, it’s like getting 0.2% each month (5%/12 months) which comes down to 0.1% per 3 months . That means if you want to reinvest your early cash at least partially in another security paying 5%, you’d better do it earlier than 3 months otherwise it will be too late! So each quarter , we’re only getting 0.05% (or $0.025) instead of $0.1 which means that your initial investment is now worth $133.33 but if you sold it then, you would have made a total of $53 . This is what I meant by capital gains/losses: they depend on the interest rates and how long you hold your bonds for so we can’t really calculate them beforehand.

What about inflation?

The value of this bond decreases because inflation erodes the value of money over time . If there’s no inflation, then our 100$ would still be worth 100$ in 5 years! But government statistics say that prices are 1.8% higher every year , so our 100$ would only be worth 98.8$ in 5 years . It sounds small but it adds up fast especially if you’re not earning much!

This is why bond returns are often quoted as a “real yield” which measures return after inflation has been taken into account.


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