Understanding Bond Yields

Nominal Yield

The nominal yield is the fixed coupon rate on the bond. It is what the issuer is paying the bond holders based on the number of bonds you own. The price does not effect the nominal yield on the bond (coupon rate) or the interest payments.

During times if high interest rates, new issues of these bonds will be higher. When we are in a lower interest rate environment, coupon rates will be lower. If you buy a high nominal yield bond in the secondary market when interest rates are lower, you will pay a higher price for that bond.

Current Yield

The current yield on a bond is calculated by taking the annual interest payments and dividing that by the current market price. Your current yield is not that important, if you are holding the bond to maturity.

Yield to Maturity

When a bond is priced, it should be evaluated based on it's yield to maturity. The YTM factors in everything that is most important to the investor. The price, the nominal yield and the years to maturity. A bond could have a 4% coupon rate, but if the price is discounted low enough, you could have a yield to maturity of over 6%, 7% or more. This is why the YTM is the most important indicator or yield when looking to buy. If a bond has an 8% nominal rate, but the price is higher than par ($100), you are not getting an overall yield of 8%

Yield To Call

Some bonds are redeemed or called prior to maturity. If that is the case, your investment in the bond will end early. Looking at the yield to call would be important and it is where most callable bonds are priced to. The Yield to call is just like the YTM, except it is realized sooner - good or bad.

Sell bonds to banks and institutions

Recommended Book Titles on Bonds

The Bond Bible - Whatever your age, income or total assets, bonds belong in your portfolio. A symbol of security, bonds have long had a place in any well-rounded portfolio. As millions of baby boomers shift their focus from the lure of capital appreciation to the necessity of capital preservation, bonds are moving from a supporting role to the spotlight. Many individual investors, however, know precious little about them. Marilyn Cohen, one of the nation's best known columnists and commentators on the bond market, demystifies bond investing and offers a shopper's guide to finding great bond buys and a master blueprint for building a winning personal bond portfolio.

The Fundamentals of Municipal Bonds, 5th Edition - This informative volume is an update of the long-heralded classic text on the municipal securities market. Written by Judy Wesalo Temel for The Bond Market Association–the leading trade association that represents the players in this market and whose members underwrite 900f all municipal bonds–this newly revised Fifth Edition deals comprehensively with the many recent developments in the municipal securities market. It provides a basic understanding of the market for a wide range of readers, including experienced professionals, public officials, private investors, academicians, and students.

The Strategic Bond Investor : Strategies and Tools to Unlock the Power of the Bond Market - The Strategic Bond Investor reveals a dramatic new approach for using bonds to balance portfolios while grabbing profit opportunities as they present themselves. It represents a new style of bond investing, bold yet risk-conscious, that is long overdue for today's transformed market environment. Investors looking to diversify their portfolios will discover: Key economic releases and how they influence bond prices, Popular fixed-income portfolio management strategies and the best-performing bonds in a variety of economic circumstances.

The Sales Bible: The Ultimate Sales Resource, Revised Edition - Gitomer, a former salesman who is now a consultant and journalist, shares his tips on how to be a successful salesperson. He provides motivational advice and practical techniques for initiating, maintaining, and closing a sales presentation. Written in a breezy manner with short, easy-to-remember suggestions, this book should prove popular with persons just getting started in this field or those needing an inspirational pep talk. In an area where there are literally dozens of works already available, this isn't an essential purchase, but it will prove helpful to anyone who reads it. It is accompanied by flash cards and a computer disc on sales techniques.