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Yield. The rate of return on an
investment, described as a percentage of the amount of the investment. For
example, a bond purchased for $1,000 with a 7 percent yield would pay out 7
percent of $1,000, or $70.
Yield-to-maturity. The fully compounded rate of
return paid out over a bond's life, from purchase date to maturity, including
appreciation and earnings. It is the most comprehensive measure of yield.
Accrued interest. The interest that has been
accumulating on a bond since the last time interest was paid on it.
Current yield. The expected rate of return
calculated by dividing the most recent annualized distribution by the selling
price. For example, a $1,000 par bond that pays $70 (7 percent) but is
bought for $800 has a current yield of 8 3/4 percent. The formula for deriving
current yield is annual income divided by current price.
Coupon rate. The interest as a percent of par paid
by a bond. It is called a coupon rate because, historically, bonds included
attached coupons that were clipped and surrendered for cash. Today, most bonds
come without the attached coupons.
Duration. The change in value of a bond (expressed
in years) caused by a 1 percent change in the prevailing interest rates. For
example: if the Federal Reserve raises interest rates by 1 percent and a bond
drops in price by 10 percent, the duration is 10 years.
Floating-interest rate. A variable interest rate.
One that changes periodically.
Floating-interest bond. A bond with an interest
rate that changes each quarter to reflect economic conditions.
Fixed-interest bond. A bond with an interest rate
that stays the same over its lifespan. |
