Determining Corporate Bond Yields

A corporate bond yield is just about the most important number to consider when determining a bond’s potential earnings and weighing it against other investment options.You can use a simple formula to calculate the yield of a bond you currently own. Or, if you are comparing before buying corporate bonds, calculate the yield-to-maturity for its capability of earning more in the future.

The following are what you need to know about a bond in order to ascertain the yield:

Price: The price of a bond can change every day because it is based on fluctuating corporate bond spreads. The current price, not the amount for which you purchased it (par value), should be used in calculating the yield.

Coupon: This is the bond’s interest rate. You are usually paid the coupon semi-annually. In other words, a 10 percent interest rate on a $1,000 bond means you are paid a coupon of $100 a year (or $50 every six months).

Maturity date: This is when the corporation must pay investors back. In most cases, you don’t have to hold a corporate bond until maturity. However, knowing how many years the bond has until it matures will aid you in figuring out its yield-to-maturity and potential future gains.

In order to calculate a bond’s yield in present time, divide the coupon by the bond’s price and multiply by 100. For example, the above mentioned corporate bond with a coupon of $100, divided by the price of $1,000 and multiplied by 100 equals a yield of 10 percent. However, if the price of the bond drops to $800, the yield becomes a more valuable 12.5 percent.

Calculating a bond’s yield-to-maturity is a more complicated formula, but you can easily find an online calculator. The yield-to-maturity is what you need to consider when comparing several corporate bonds before purchasing.