Bond Yield

What Is a Bond Yield?

Bond yield indicates the annualised return on a bond based on its current price, the interest it pays (coupon), and the time remaining to maturity. It helps investors compare bonds with different prices, maturities, and interest rates.

Example

If you buy a bond with a face value of ₹1,000, a coupon rate of 7 percent, and the bond is currently trading at ₹950, the yield will be higher than 7 percent because you are buying the bond at a discount. This adjusted return is reflected in the Yield to Maturity (YTM).

Key Components of Bond Yield

• Coupon Rate: The fixed interest the bond pays annually

• Current Market Price: The bond’s price in the secondary market, which fluctuates with demand and interest rates

• Face Value: The amount repaid by the issuer at maturity

• Yield to Maturity (YTM): The total return you can expect if you hold the bond until it matures

Benefits of Investing in Bonds

• Stable Income: Bonds offer predictable interest payments, making them ideal for income planning

• Diversification: Bonds reduce portfolio risk by balancing more volatile investments like equities

• Lower Risk: Government and high-rated corporate bonds generally have lower default risk

Challenges to Consider

• Interest Rate Risk: When interest rates rise, bond prices fall, reducing the value of existing bonds

• Global Impact: Economic developments, such as shifts in US Federal Reserve policy or geopolitical tensions, can affect Indian bond yields

• Liquidity: Some bonds may not trade actively, making it difficult to exit at the desired price

Conclusion

Bond yields are a critical tool for investors looking to plan regular income and preserve capital. Understanding how yields work helps in selecting the right bonds based on time horizon, return expectations, and market conditions. With yields easing in 2025, it is important to balance income goals with the potential impact of changing interest rates on bond prices.