New finance made easy site launched

March 29, 2012 - PRLog -- The main types of bond yield
There are three main yields applicable to dated bonds:

Coupon rate
This is the interest rate the bond initially pays on issue. It’s invariably given in the name of the bond.

For instance Treasury 5% would have a coupon of 5%. i.e. If you bought it when it was first issued — before the price began to fluctuate in the market — you’d get 5% interest annually for the life of the bond (ignoring costs). The coupon rate is also known as the interest rate.

Running yield
Bond prices fluctuate in value as they are bought and sold in the secondary market. As their price changes, so does the running yield that the (fixed) coupon delivers on the (variable) price paid.

The running yield is also called the flat yield or the interest yield.

Redemption yield
Bonds with a fixed lifespan pay back their nominal face/par value when they mature. If you buy a bond at less than par and hold to maturity you’ll make a capital gain. If you pay more than par, you’ll make a capital loss.

The redemption yield adjusts the running yield to take this gain or loss into account. It’s the most important yield calculation in most circumstances.

It is also called the yield to maturity (YTM).

How to calculate the running yield
The running yield is very easy to work out.

Let’s say Treasury 5% has five years to maturity and is currently selling for £120. It has a nominal value of £100.

We can see from its name that it pays a coupon of 5% of £100, so £5 per year.