Taxable Bonds

Bond Yields

A bond yield represents the rate of return on a bondholder’s investment. A yield is construed of the purchase price, redemption value, and amount of time remaining until maturity. The nominal yield or coupon yield is the percentage of par, or the face value ($1,000) divided by the annual interest paid from a bond. Bonds and interest rates have an inverse relationship, as interest rates rise bond prices fall and vice versa. In order to calculate the actual rate of return, an investor needs to look at the current yield. The coupon payment divided by the current market price is the current yield of a bond. The yield to maturity is a rate of return on a bond if held to maturity. The amount paid at maturity will increase if an investor purchased a bond at a discount, on a premium bond the yield to maturity will be less the premium paid. Bonds with a call feature allow an issuer to call bonds before their final maturity. An issuer might decide to do so if the cost of borrowing in the market place is cheaper than what it currently pays. When an issuer calls a higher yielding bond it exposes investors to reinvestment risk. Funds thereafter, are likely to be reinvested at lower market yields. The yield to call reflects an early redemption date. When a bond is called at par, the yield to call indicates the return on a discount or a premium either gained or lost from the original purchase price of a bond. This process is advantageous to a bond bought at a discount because it realizes a gain sooner, whereas, a premium bond realizes a loss.

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