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bond yield

Also called: yield

The yearly return a bond pays if bought at today's price and held to maturity.

A bond's yield is the yearly return you get if you buy it at today's price and hold it to maturity. It combines the coupon with the gap between the price you pay and the face value you get back. When people search "why do bond prices fall when yields rise", this link is the answer: price and yield are two sides of the same number.

Here is why they move in opposite directions. A bond's payments are fixed. If new bonds start paying more, nobody will pay full price for an older bond that pays less, so its price drops until the return a buyer gets from it matches the new ones. When yields fall, the opposite happens and older bonds become worth more.

For an investor, today's yield is the best simple guide to what a bond or a bond fund is likely to return over its life, before inflation and costs. It is not a promise for the next year: a rise in rates can cause a loss first and higher income later.

Example

A Zapas $1,000 long bond pays a 4% coupon, $40 a year. Yields on new bonds jump by 2 points, and with a duration of 15 its price falls about 30%, to $700. That year's return is roughly 4 − 30 = −26%.

The upside comes later: the same $40 now earns about 40 / 700 ≈ 5.7% on the new price (the current yield), and the bond still returns $1,000 at maturity, so a buyer today locks in a higher yield than the original owner. If yields fall by 1 point instead, the price rises about 15%, to $1,150.

Common mistakes

  • Confusing the coupon with the yield: the coupon is fixed, the yield changes with the price.
  • Treating today's yield as a guaranteed return for next year rather than over the bond's life.
  • Forgetting inflation: a 4% yield with 9% inflation is a real loss.
  • Chasing the highest yield without asking why it is high, often a riskier borrower or a much longer bond.

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