How is the yield calculated for bonds?

How is the yield calculated for bonds?

• A. By dividing the bond issuer's reputation by the bond's face value
• B. By dividing the annual interest by the current price
• C. By calculating the total premium paid divided by the yield duration
• D. By analyzing the market demand for similar bonds

Answer: (B)

The yield for bonds is primarily calculated by dividing the annual interest payment, often referred to as the coupon payment, by the current market price of the bond. This method gives investors a straightforward way to assess the return they can expect from a bond relative to what they would pay to acquire it at that moment. When the current price is lower than the bond's face value, the yield rises, indicating a potentially better return for investors. Conversely, if the price is above the face value, the yield decreases. This yield calculation is crucial for investors evaluating the attractiveness of bonds in relation to prevailing interest rates and market conditions. This approach directly links the income an investor receives from holding a bond with how much they have to pay to acquire it, providing a clear measure of value for investment decisions.

The yield for bonds is primarily calculated by dividing the annual interest payment, often referred to as the coupon payment, by the current market price of the bond. This method gives investors a straightforward way to assess the return they can expect from a bond relative to what they would pay to acquire it at that moment.

When the current price is lower than the bond's face value, the yield rises, indicating a potentially better return for investors. Conversely, if the price is above the face value, the yield decreases. This yield calculation is crucial for investors evaluating the attractiveness of bonds in relation to prevailing interest rates and market conditions.

This approach directly links the income an investor receives from holding a bond with how much they have to pay to acquire it, providing a clear measure of value for investment decisions.