One of the more confusing aspects of bond investing is the relationship of bond price and yield. As bond investors we want high prices and high yields but it’s just not possible. At least not at the same time. This is where the confusion begins. In a time where interest rates are at all time lows, understanding the bond price and yield relationship is important.
Bonds play an important part of every portfolio. The basic asset allocation strategy says to have your age as the percent of bonds in your portfolio. I could argue for more or less based on interest rate risk and current yields, but that’s a post for another day. The bottom line is we should have some bond exposure in our portfolio. For now, lets just stick to the basics of the bond price and yield relationship.
Bond Yield
New bonds are issued at face value (par), with a time to maturity, and a yield (coupon rate) that involves several factors including risk. Bond yield is the return you will receive if you hold the bond till maturity. It’s in annual percentage form. So a bond with a 5% yield, will pay a 5% return each year until the bond matures. Continue Reading…