INTEREST AND YIELDS

Besides returning the principal, bonds guarantee payment of interest at a specified rate. The rate of interest on the face amount (par) is referred to as the coupon rate or interest rate.

The yield is the rate the bondholder receives as a percentage of the investment. If the bondholder pays the face amount (par) for the bond, the coupon rate and yield are the same. In this example, the coupon rate is the nominal yield.

The current yield is the yearly interest payment relative to its price in the secondary market. To calculate the current yield, divide the annual interest payment by the current market value.

The yield-to-maturity is the fully compounded rate of return paid out over a bond's life, including appreciation and earnings. You would have to receive this rate on an investment today to equal the future returns on the bond.

The yield-to-call is the rate you would have to receive on an investment today to give you the future returns on the date a callable bond is called.

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