“Yield” is a common expression in Wall Street; and as with the word “security,” sometimes its meaning is what an intelligent amateur would suppose, but often it is misleading.

On Bonds

Among the corporate and government bonds bought and sold in the stock market, sometimes the purchase price, the par value, and the maturity value are all the same amount. Suppose this amount is $1,000, and the annual interest is $40. This interest is at the rate of 4 per cent per annum on the par value, and in this case 4 per cent is also the yield, meaning the annual interest amount divided by the price.

But usually the purchase price on a bond is not the same as par or maturity value, and this difference gives two ways to figure yield. Suppose the current price of the bond is $800, whereas it will mature at $1,000. Ignoring the maturity value, we say the “current yield” is the annual in terest, $40, divided by the price, which gives 5 per cent. But at maturity, this bond will have a value $200 more than its current price. The “yield to maturity” includes the pro spective change in value as well as the annual interest. We skip the details of this calculation, because our purpose here is merely to show that for a bond the yield is a useful idea, with two different but definite meanings. Certified Financial Planner - Read More.