Yield
is the amount you actually earn in bond interest, expressed as a percentage. If you buy a 10-year $1,000 bond paying 6% and hold it until it matures, you'll earn $60 a year for ten years — an annual yield of 6%, which is the same as the interest rate. But if you buy in the secondary market, after the date of issue, the bond's yield may not be the same as its interest rate. That's because the price you pay affects the yield.
For example, if a bond's current yield is 5%, it means your interest payments will be 5% of what you pay for the bond today — or 5% back on your investment annually. You can use the yield to compare the relative value of bonds.
Return,
on the other hand, is what you make on the investment when the par value of the bond, your profit or loss from trading it, and the yield, are computed.
There's an even more precise measure of a bond's current value called the
yield to maturity.
It takes into account:
The interest rate in relation to the price
The purchase price in relation to the par value
The years remaining until the bond matures
Yield to maturity is a way to predict return
over time, but it is calculated by a complicated formula — and it isn't often stated in newspaper bond tables. Brokers have access to the information, and it's available on Web sites that specialize in bond information or bond trading.
