Bond Yield Formula

What is Bond Yield Formula?

The bond yield formula evaluates the returns from investment in a given bond. It is calculated as the percentage of the annual coupon payment to the bond price. The annual coupon payment is calculated by multiplying the bond’s face value with the coupon rate.

Calculate Bond Yield

Let us understand the bond yield equation under the current yield in detail.

Bond Yield Formula = Annual Coupon Payment / Bond Price

  • Bond Prices and Bond Yield have an inverse relationship
  • When bond price increases, bond yield decreases.
  • When bond price decreases, bond yield increases.
Bond-Yield-Formula

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Examples of Bond Yield Calculation

Let’s see some simple to advanced practical examples of the bond yield equation to understand it better.

You can download this Bond Yield Formula Excel Template here – Bond Yield Formula Excel Template

Example #1

Suppose a bond has a face value of $1300. And the interest promised to pay (coupon rated) is 6%. Find the bond yield if the bond price is $1600.

  • Face Value = $1300
  • Coupon Rate = 6%
  • Bond Price = $1600

Solution:

Here we have to understand that this calculation completely depends on annual coupon and bond price. It completely ignores the time value of money, frequency of payment, and amount value at the time of maturity.

Bond Yield Formula - Example 1

Step 1: Calculation of the coupon payment annual payment

Annual Coupon Payment = Face Value * Coupon Rate

Bond Yield Formula - Example 1-1
  • =$1300*6%
  • Annual Coupon Payment =$78

Step 2: Calculation of bond yield

Bond Yield = Annual Coupon Payment/Bond Price

Bond Yield Formula - Example 1-2
  • =$78/$1600

Bond Yield will be –

Bond Yield Formula - Example 1-3
  • =0.04875 we have considered in percentages by multiplying with 100’s
  • =0.048*100
  • Bond Yield =4.875%

Here we have to saw that increase in bond prices results in the decrease in bond yield.

Example #2

If a bond has a face value of $1000 and its prices $970 now and the coupon rate is 5%, find the bond yield.

  • Face Value =$1000
  • Coupon Rate=5%
  • Bond Price = $970

Solution:

Here we have to understand that this calculation completely depends on annual coupon and bond price. It completely ignores the time value of moneyTime Value Of MoneyThe Time Value of Money (TVM) principle states that money received in the present is of higher worth than money received in the future because money received now can be invested and used to generate cash flows to the enterprise in the future in the form of interest or from future investment appreciation and reinvestment.read more, frequency of payment, and amount value at the time of maturity.

Bond Yield Formula - Example 2

Step 1: Calculation of the coupon payment Annual Payment

Bond Yield Formula - Example 2-1
  • =$1000*5%
  • Annual Payment =$50

Step 2: Calculation of bond yield

Bond Yield Formula - Example 2-2
  • =$50/$970

Bond Yield will be –

Bond Yield Formula - Example 2-3
  • =0.052*100
  • Bond Yield =5.2%

Hence it is clear that if bond price decrease, bond yield increase.

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This has been a guide to Bond Yield Formula. Here we discuss how to calculate bond yield along with practical examples and a downloadable excel template. You can learn more about financial analysis from the following articles –