## 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.

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For eg:

Source: Bond Yield Formula (wallstreetmojo.com)

### Examples of Bond Yield Calculation

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

#### 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.

** Step 1:** Calculation of the coupon payment annual payment

**Annual Coupon Payment = Face Value * Coupon Rate**

- =$1300*6%
**Annual Coupon Payment =$78**

__Step 2____:__ Calculation of bond yield

**Bond Yield = Annual Coupon Payment/Bond Price**

- =$78/$1600

**Bond Yield will be –**

- =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.

** Step 1:** Calculation of the coupon payment Annual Payment

- =$1000*5%
**Annual Payment =$50**

__Step 2____:__ Calculation of bond yield

- =$50/$970

**Bond Yield will be –**

- =0.052*100
**Bond Yield =5.2%**

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

### Recommended Articles

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