The Ins and Outs of Bond Yield
Step 6: How Should I Interpret My Bond's Reported Return?
What the Numbers Tell You
What Determines the Return on My Bond?
Why Are There Different Bond Yields?
How Is Yield to Maturity Calculated?
What Makes Up My Bond's Total Return?
Do Bond Funds Have a Yield to Maturity?
How Should I Interpret My Bond's Reported Return?
To sum up, when you buy an individual bond, you will be quoted the price of the bond, the coupon yield, its current yield, its years to maturity, and its yield to maturity.
What does this information convey?
- The coupon yield will tell you how much income you will receive each year you own the bond.
- The current yield will tell you how much interest income you will receive each year relative to the price you are paying for the bond.
- You will also know that if you hold the bond to maturity, on that date, you can redeem the bond at par.
- The yield to maturity will give you an estimate of the total return of the bond, assuming the bond is held to maturity and all coupons are reinvested at a rate equal to the yield to maturity.
- The YTM will not be your actual return. Your actual total return will be determined by a number of factors, including whether you spend dividend income or reinvest it; the rates at which you reinvest coupons; and the difference between the price you pay and your selling (or redemption) price.
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