Determining Yield On Bonds

by David Jenyns on May 26, 2008

Ignoring the maturity value, we say the “current yield” is the annual interest, $40, divided by the price, which gives five percent. But at maturity, this bond will have a value $200 more than its current price.

The “yield to maturity” includes the prospective change in value as well as the annual interest. At present, the yield tends to be higher on a bond with a more distant maturity. On E bonds and other savings bonds issued by the U. S. government, with rigid schedules of values and interest disbursements, the yield has a peculiar meaning. On an E bond, semi-annual increases in redemption value take the place of interest disbursements. Cautious investors can count on government bonds to produce a steady and predictable, if low, yield.

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