If you buy a bond in the secondary market,
after the date of issue, the bond's yield,
or more precisely its current yield,
differs from its interest rate.
That's because bond prices aren't
fixed at their par value of $1,000, and generally sell for more or less than
that amount. The actual price is determined by supply and demand,
or what investors are willing to pay. And the current yield is
determined by the price at the time of purchase.
If the price is more than par, or a premium,
the current yield is less than the bond's interest rate.
For example, if you spend $1,200 for a $1,000 bond paying 6% interest,
the yield would be 5%.
And if the price is less than par, or a discount,
the current yield is more than the stated interest. In this case,
if you pay $920 for a 6% bond, the yield is 6.52%.
While a bond's current yield changes
every time its price changes, your yield on a bond is fixed by
the price you pay.
