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The investment return of a bond is the difference between what an investor pays for a bond and what is ultimately received over the term of the bond. The bond yield
is the annualized return of the bond. Thus, bond yield will depend on
the purchase price of the bond, its stated interest rate — which is
equal to the annual payments by the issuer to the bondholder divided by
the par value of the bond — plus the amount paid at maturity. Because
the stated interest rate and par value are stipulated in the bond indenture,
the price of the bond will vary inversely to prevailing interest rates.
If interest rates rise, then the price of the bond must decrease to
remain competitive with other investments and vice versa.
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Aug 2nd, 2015
Nominal yield, or the coupon rate, is the stated interest rate of the bond. This yield percentage is the percentage of par value—$5,000
for municipal bonds, and $1,000 for most other bonds—that is usually
paid semiannually. Thus, a bond with a $1,000 par value that pays 5%
interest pays $50 dollars per year in 2 semi-annual payments of $25. The
return of a bond is the return/investment, or in the example just
cited, $50/$1,000 = 5%.
Aug 2nd, 2015
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