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Bonds: yields and interest rates

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jimaustri123 Posted: Tue, Jan 22 2013 8:23 AM

I know next to nothing about bonds and I gather the bond market is a key component to understanding current economies.

I understand what a bond is but I'd like to know:

Is the 'yield' the same as the interest rate and does the interest payment/yield get paid regularly? And if it is paid regularly e.g. monthly, is that payment subject to fluctuations from one payment to the next? i.e. it's not like a variable rate on a mortgage.

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Bogart replied on Tue, Jan 22 2013 9:45 AM

The interest rate does not tell the whole story about the price of a bond.  The yield does.  The yield allows you to compare bonds with differeing interest rates.  You can look up the specifics of how to compute yield but it is something like this:

Yield, really Yield to Maturity, is for a simple bond that pays all interest at the expiration of the contract: the payoff at the end of bond contract minus the current price of the bond computed in terms of the number of years until the end of the bond contract.  So a 10 year bond that pays double the original price would have a yield of 7%(or close to that number).  If you have coupons, intermediate payments, then you have to add that into the calculation of yield:  So if the bond above paid 7% per year plus doubled the original price then the yield would be around 14%.

Note that in the case of a simple bond the interest rate only factors into the calculation in the computation of what is paid out.  The yield on the other hand reflects the not only the payout but the risk of this bond paying out versus other bonds paying out.

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Hm. That's helpful, Thanks. But it will probably prove to be even more helpful a lttle further down the line for me. I think I need something along the lines of a bond-101 article/paper.

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