Bond yield calculations | Bond earnings

By | September 27, 2013
The earnings on a bond are known as its yield. The yield is based on the bond purchase price and interest rate.A bond’s yield can be current yield or yield to maturity or yield to call.

A bond’s current yield is calculated by dividing the annual interest payment by the bond purchase price and is referred to as basis points – bps. One basis point is 1/100 of 1%
i.e. essentially (1/100)*(1/100) which equates to .0001.

So if the purchase price of a bond is $1000 and interest is 5%, the annual interest payment is
$50. The bond yield will be 50/1000 which is 5% which is (5/100 / 0.0001) or 500 basis points.

If the purchase price of a bond is $900 and interest is 5%, the annual interest payment is $50.
The bond yield will be 50/900 which is 5.56% which is (5.56/100 / 0.0001) 556 basis points.

The yield to maturity is the total earnings derived from the bond if it is held to maturity
including interest earned and any loss or gain of principal. Similar to yield to maturity is
yield to call which is the total earnings of a bond until it is called which is generally before
maturity date.

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