- Bonds have a face value (usually what it is sold for initially), however they also have a market value which fluctuates.
- is the rate of interest it pays, expressed as a percentage of its market value.
- if you bought a £100m bond with a 5% coupon, your yield would be 5%
- yield of a bond is inversely related to its current price - meaning that if the price of a bond falls, its yield goes up.
- if our bond with a face value of £100m fell to a market price of £90m, the yield would rise to 5.55% (5/90 x 100).
- If the price of our bond rose to £110m then the yield would fall to 4.54%. (5/110 x 100).
- The higher the yield of a bond, the riskier it is seen to be and the greater the chance that a company or government which issued it may not be able to repay the money.