Bond yield measures

There are three bond yield measures commonly quoted by dealers and used by investors:

Current yield

To obtain the current yield, the annual coupon interest is divided by the market price.

The current yield calculation takes into account only the coupon interest and no other source of return that will affect an investor's yield.

The capital gain that the investor will realize when a bond is purchased at a discount or the capital loss that the investor will realize if a bond purchased at a premium is held to maturity are not taken into consideration. The time value of money is also ignored.

Yield to maturity

The yield on any investment is the interest rate that will make the present value of the cash flows from the investment equal to the price of the investment.

As a starting point an approximate value is calculated as being the average income per period divided by the average amount invested. FinKit displays this value as the average yield.

To find a more accurate value, an iterative procedure is used. The objective is to find the interest rate that will make present value of the cash flows equal to the price. FinKit calculates the yield to maturity to four digits after the decimal point.

Yield to call

For bonds that may be called prior to the stated maturity date another yield measure is commonly quoted: it is the yield to call.

To compute the yield to call, the cash flows that occur if the issue is called on its first call date are used.

To calculate the yield to call using FinKit, just enter the call date as the redemption date and enter the call price as the redemption value: the yield to call will equal the yield to maturity result.

 

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Bond features

Bond pricing issues

Bond Yield

Zero-Coupon Bond Yield