The yield represents the effective interest rate on the bond, determined by the relationship between the coupon rate and the current price. Coupon rates are fixed, but yields are not. General interest rates have a huge impact on investing, and this is also true with bonds.
Relationship between bond prices and interest rates
Conversely, a bond with a higher coupon rate than the market rate of interest tends to raise in price. The credit rating given to bonds also has a large influence on price. It could be very possible that the bond's price does not accurately reflect the relationship between the coupon rate and other interest rates. All things being equal, however, the coupon rate affects the price of bonds until the current yield equals prevailing interest rates.
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Because each bond returns its full par value to the bondholder upon maturity, investors can increase bonds' total yield by purchasing them at below-par prices, referred to as a discount. Your Money.
Personal Finance. A bond's yield can be measured in a few different ways.
Current yield compares the coupon rate to the current market price of the bond. A more comprehensive measure of a bond's rate of return is its yield to maturity. Since it is possible to generate profit or loss by purchasing bonds below or above par, this yield calculation takes into account the effect of the purchase price on the total rate of return. If a bond's purchase price is equal to its par value, then the coupon rate, current yield, and yield to maturity are the same.
What is the difference between the coupon / interest rate and the yield / rate of return?
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