Types of Bond Yields | Alamo Capital (2024)

FAQs

Types of Bond Yields | Alamo Capital? ›

Understanding Yields

Some of these different types of bond yields include among others, the so called running yield, nominal yield, yield to maturity (YTM), yield to call (YTC) and yield to worst (YTW).

While YTM represents the expected return assuming the bond is held until maturity, YTC focuses on the return if the bond issuer chooses to call the bond before maturity. YTW, on the other hand, considers both these scenarios and selects the worst outcome, providing a cautious perspective for investors.

The coupon rate is the stated periodic interest payment due to the bondholder at specified times. The bond's yield is the anticipated rate of return from the coupon payments alone, calculated by dividing the annual coupon payment by the bond's current market price.

The Treasury yield premium model by Jens H.E. Christensen and Glenn D. Rudebusch (CR) decomposes the nominal yield curve into three components: future short-term interest rate expectations, a term premium that measures bond investor aversion to the risk of holding longer-maturity bonds, and a model residual.

Are Treasury yields and Treasury bonds the same thing? No. A Treasury yield is the effective annual interest rate paid by the U.S. government to a bondholder. A Treasury bond is a loan that you make to the government.

Yield to maturity is the total return that will be paid out from the time of a bond's purchase to its expiration date. Yield to call is the price that will be paid if the issuer of a callable bond opts to pay it off early. Callable bonds generally offer a slightly higher yield to maturity.

If a bond's yield to maturity is greater than its current yield, the bond is selling at a discount, or a price less than par value. If YTM is less than current yield, the bond is selling at a premium, or a price above the par value. If YTM equals current yield, the bond is selling at par value.

A high YTM can mean higher returns, but it could mean that the bond's quality is low, and hence the coupon offered is high.

What is a bond yield for dummies? ›

A bond yield is the return an investor realizes on a bond. Put simply, a bond yield is the return on the capital invested by an investor. Bond yields are different from bond prices—both of which share an inverse relationship. The yield matches the bond's coupon rate when the bond is issued.

Should I only buy bonds when interest rates are high? There are advantages to purchasing bonds after interest rates have risen. Along with generating a larger income stream, such bonds may be subject to less interest rate risk, as there may be a reduced chance of rates moving significantly higher from current levels.

Most bonds pay a fixed interest rate that becomes more attractive if interest rates fall, driving up demand and the price of the bond. Conversely, if interest rates rise, investors will no longer prefer the lower fixed interest rate paid by a bond, resulting in a decline in its price.

A zero-coupon bond is a debt security instrument that does not pay interest. Zero-coupon bonds trade at deep discounts, offering full face value (par) profits at maturity.

How do bond traders make money? By buying bonds when interest rates are high and selling when they are low. By accurately predicting macroeconomic trends and Central Bank moves.

To make an accurate comparison, discount rates should be converted to a semiannual bond basis (SABB), because that is the basis commonly used for longer maturity bonds. To calculate SABB, the same formula to calculate APY is used. The only difference is that compounding happens twice a year.

Current Yield is calculated by taking the annual coupon payment of a bond and dividing it by the bond market price. SEC Yield The SEC Yield calculation is an annualized measure of the respective fund's dividend and interest payments for the last 30 days, less the respective fund expenses.