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A bond's actual return based on its current price, not just its coupon.
Why It Matters
A bond's yield reflects what you actually earn given the price you pay, which can differ from the fixed coupon. Buy a bond below face value and your yield is higher than the coupon; buy above and it's lower. That's why yields, not coupons, are what investors track to compare bonds.
Key Points
- Current yield = annual coupon ÷ current price
- Yield rises when price falls, and falls when price rises
- Yield to maturity is the fuller measure, including gains or losses if held to the end
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Bond Yields Explained
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Common Questions
A bond's actual return based on its current price, not just its coupon. A bond's yield reflects what you actually earn given the price you pay, which can differ from the fixed coupon. Buy a bond below face value and your yield is higher than the coupon; buy above and it's lower.
A bond's yield reflects what you actually earn given the price you pay, which can differ from the fixed coupon. Buy a bond below face value and your yield is higher than the coupon; buy above and it's lower. That's why yields, not coupons, are what investors track to compare bonds.
Current yield = annual coupon ÷ current price
Yield rises when price falls, and falls when price rises
Yield to maturity is the fuller measure, including gains or losses if held to the end