Definition of 'Bond Yield'
Bond yields are important because they can be used to compare the returns of different bonds. They can also be used to estimate the future value of a bond. For example, if a bond has a yield of 5% and is held for one year, the bond's value will increase by 5%.
There are two main types of bond yields:
* **Current yield:** The current yield is the annual coupon payment divided by the bond's current price. It is a measure of the bond's current return.
* **Yield to maturity:** The yield to maturity is the annual return on a bond if it is held until maturity. It is a more accurate measure of the bond's return, but it is also more difficult to calculate.
Bond yields are affected by a number of factors, including the interest rate environment, the credit quality of the issuer, and the term of the bond.
The interest rate environment is the most important factor affecting bond yields. When interest rates rise, bond yields also rise. This is because investors can earn a higher return by investing in bonds with higher interest rates.
The credit quality of the issuer is also an important factor. Bonds issued by companies with strong credit ratings tend to have lower yields than bonds issued by companies with weak credit ratings. This is because investors are more confident that they will receive their payments from companies with strong credit ratings.
The term of the bond is another important factor. Short-term bonds tend to have lower yields than long-term bonds. This is because investors are more willing to accept lower yields in exchange for the liquidity of short-term bonds.
Bond yields are an important tool for investors. They can be used to compare the returns of different bonds and to estimate the future value of bonds.
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