Bond Yield Calculator

Introduction

The Bond Yield calculator will help you calculate the yield of the bond which essentially describes the potential return of a bond. It is the difference between what the investor pays for the bond and what is received over the bond term.

The measures used to describe yield are current yield and yield-to-maturity. For callable or puttable bonds, we have yield-to-call and yield-to-put.

The required yield is determined by comparing it with comparable bonds in the market. Comparable bonds will have the same risk profile and maturity, or we will use another metric called duration to compare bonds.

Furthermore, Bond yields are typically specified as annual or periodic interest rates depending upon the period of interest payments.

We can also determine the bond’s price based on the cash flows and the required bond yield.

How to use the Bond Yield Calculator?

Using the Bond Yield Calculator, we can determine the bond yield by inputting the values for

Face or Par Value The face or par value of the security

Settlement Date The date when the security is traded to the buyer. It should be after the issue date.

Maturity Date The date on which the debt matures and the bond will expire.

Rate The bond’s annual coupon rate

Bond Price The price of the bond

Redemption The security’s redemption value per $100 face value

Frequency The number of coupon payments per year.

Day Count Basis The day count basis used for the calculation

Bond Yield The bond’s yield.

What are Bonds?

A bond is a debt instrument; the bond buyer lends money to the issuer and expects the borrowed amount to be repaid with interest, and most bonds pay regular interest until they mature.

Basically, the interest paid is the compensation the borrower provides to the lender for lending them the money. Since the interest the bond pays is fixed, bonds are a type of fixed-income security.

Governments, corporations, or agencies issue bonds, which can be publicly placed (anyone can buy them) or privately placed (sold only to a few select investors). Bonds can be secured using collateral or maybe unsecured.

Key Features of Bonds

Maturity

Generally, It is the date on which the borrower will repay the principal, and the bond will cease. The bondholder can expect to receive coupon interest in the period in between. The bond buyer can sell the bond to another buyer before maturity, but the price may vary.

The yield of a bond depends heavily on the bond’s maturity.

The price of the bond will vary depending upon maturity. For example, if the interest rates changes, the effect of the change will be more drastic on the price of a bond with a shorter maturity than that of a bond with a long maturity.

Face Value

The face value also called the par value of a bond, is the amount repaid to the investor at maturity.

Coupon Rate

The interest rate the borrower must pay the bondholders during the bond term is called the coupon rate.

We get the coupon paid to the bondholders by multiplying the coupon rate and the par or face value.

Frequency

The coupon payments must be made periodically, whether monthly, quarterly, semiannually, or annually. These terms will be specified during the issue of the bond. Typically, In the United States, the coupon payment is made semiannually. In European bond markets, coupon payment is usually made annually.

Yield

The bond yield is the annualized return of a bond, expressed as the percentage of invested capital.

A bond’s yield depends upon its price, coupon rate, and amount paid at maturity.

Types of Yield Measures

Nominal Yield

the nominal yield is also known as the coupon rate of the bond. The stated interest rate is calculated as a percentage of the par value.

A bond with a $1000 par value that pays 5% interest semiannually will pay out $25 payments every six months totaling $50 at the end of the year so that the nominal yield will be $50 / $1000 = 5%.

\text{Nominal Yield}= \normalsize \dfrac{\text{Annual Interest Payment}}{\text{Par Value}}

The price of the bond and the interest rates are inversely related if interest rates rise, the bond prices will decline, and if the interest rates fall, the bond prices will increase.

So, when the price of a bond changes, the bond’s yield or return will also change.

Current Yield

The buyer can approximate the bond’s yield by calculating the current yield of the bond by dividing the annual coupon payment by the bond price.

\text{Current Yield} = \normalsize \dfrac{\text{Annual Coupon Payment}}{\text{Current Market Price of Bond}}

True Yield or Yield-to-Maturity (YTM)

Yield-to-Maturity is the most common measure of bond yield and is the bond’s internal rate of return (IRR). Yield-to-Maturity (YTM) represents the return the investor will get if the bond is held till maturity, given that the investor can reinvest the cash flows at the same rate.

Mathematically, it is the discount rate at which the sum of the present value of all future cash flows from coupon payments and the principal repayment equals the bond’s price.

When the bond is bought at a discount, the YTM will exceed the current yield, and if the bond is purchased at a premium, the YTM will be less than the current yield.