Investment, Assets, Returns, Equity shares, Bonds, Stock Market, Deposits, Dividends, Share, and other words in finance are important qualities and contribute to one’s business. The amount of money earned or lost on investment for a given period is known as a return. Bonds are part of or say a unit of corporate securities that are securitized as assets that are tradable in nature. Bonds are issued by corporations and are considered fixed-income instruments.
There are mainly four types of Bonds surfacing in the market: Corporate Bonds, Municipal Bonds, Government Bonds, and Agency Bonds. Corporate bonds are those which is issued by a company. State municipalities have the authority to issue Municipal bonds. The U.S. Treasury issues Government bonds. These are of three types, namely, Bills, Notes, and Bonds, based on their duration of maturity. Agency Bonds are those bonds that are issued by a Government-affiliated organization.
Bond Yield vs Bond Price
The main difference between Bond Yield and Bond Price is that the bond yield is the return on the bond investment, whereas the bond price is the monetary value of the particular bond. Both bond yield and bond price are interdependent and have an inverse relationship. Bonds have three basic parameters: Face value, Bond yield, and Bond price.
Bond yield is also expressed as yield to maturity, which is the total return on the investment on the bond if the investment on the bond is kept till its actual maturity period and all the coupons are received on time and re-invested in the bond at the same interest rate as that of the bond. It is expressed in percentage terms.
Bond price is the monetary value of the bond which an investor will receive at the end of the maturity term of investment on the Bond. It incorporates coupons as well as capital investment. It varies greatly and is expressed in terms of the percentage of face value.
Comparison Table Between Bond Yield and Bond Price
| Parameters of Comparison | Bond Yield | Bond Price |
| Meaning | It is the interest rate on an invested bond and can vary differently. | It is the valuation of a bond in monetary terms. |
| Formula | Yield= (bond interest/ bond price)*100 | Bond Price = ∑(Cn / (1+YTM)n )+ P / (1+i)n n= Maturity term YTM= yield to maturity C=Coupon payment P= Par value of bond i= Interest rate |
| Relationship | Inversely dependent on the Bond price | Inversely dependent on Bond yield |
| Mutual relationship | It depends on bond price and inversely changes itself to balance the interest rates. | It depends on bond yield and inversely changes itself to balance the interest rates as they do not change. |
| Vitality | A bond yield is a must for every bond as it describes the returns. | Bond price is essential for a bond to describe its evaluation. |
What is Bond Yield?
Bond yield can be defined in terms of annual percentage and is the return on a specific bond invested. So, if the Bond yield is 10% on the investment, it will give an average of 10% returns on the investment. Bonds, when mature, can be sold in the open market at a reasonable price which usually fluctuates daily.
The formulae for bond yield calculation is:
Current yield= (annual interest/bond price)*100
Yield is inversely proportional to the bond price. Regardless of the bond price, the coupon always stays the same. Bond yield is also referred to as yield to maturity(YTM) by the investors. It is the overall sum of all the interest payments received by the investor and the profit or loss that occurred. Yield to maturity somehow helps in the comparison between different types of maturities and coupons. It involves a complex calculation and includes factors such as the bond’s coupon rate, bond price, time remaining for maturity, and face value, and bond price difference.
What is Bond Price?
Bond price is the monetary value of a bond that is paid by an investor for the acquisition of the bond. It is expressed as a percentage of the face value of the bonds. Bond prices change on a daily basis in accordance with the market and the interest rates.
If the interest rate hikes after the purchase of the bonds, the bond price of those bonds decreases as the new bonds with a higher coupon rate are likely to be issued. A high-interest rate indicates a decrease in the price of existing bonds.
However, the bond price of the existing bonds increases if there is a decrease in the interest rates. This usually indicates that the investors can gain a profit by selling the bond at a higher price than that of while it was purchased.
Main Differences Between Bond Yield and Bond Price
- Bond yield has an inverse relationship with the bond price. As the price increases, the yield decreases and vice-versa.
- The change in bond yield affects the bond price and vice versa. If the bond yield rises, the price has to decrease in order to balance the interest rates.
- Bond yield is the return or monetary benefit or loss on an investment, whereas the bond price is the monetary value of a bond.
- While the yield is one of the major factors considered by the investor while investing in calculating the return, the bond price is seen to check that how much the investor is capable of investing.
- The bond yield is expressed as a percentage value, while the bond price is monetary value. E.g., the yield value of a bond is 4%, while its price is Rs.1000. it means the return on this investment will be Rs.40.
Conclusion
Finance can seem to be a complicated industry, but it has a lot to offer. Bond Yield and Bond Price are essential factors to consider when purchasing a bond. The term Bond Yield refers to a bond’s return rate, while the Bond Price refers to the amount to be paid for purchasing a bond. Both are interdependent and are inversely related.
While Bonds may look like a small investment from the outside, it gives a tremendous amount of return when the investment is made properly till its maturity, including the re-investment of all the coupons with the same interest rate as that of the actual bonds.
References
- https://www.sciencedirect.com/science/article/pii/B9780444594068000135
- https://www.tandfonline.com/doi/abs/10.1080/09603100801964370