Bond Yield
a.k.a. Yield
The return a bond pays you each year as a percentage of its price. When bond prices fall, yields rise, and vice versa.
A bond yield is the interest a bond earns, measured against what you pay for it. Bonds pay a fixed coupon, so if the price drops, that same coupon is a bigger slice of what you paid, and the yield rises. Price and yield sit on opposite ends of a seesaw.
Currency traders watch government bond yields closely. If US yields climb faster than German ones, holding dollars pays more than holding euros, and money tends to flow toward the dollar. The difference between two countries' yields is a big driver of exchange rates.
The seesaw
- A bond pays $40 a year and costs $1,000. Yield: 4%.
- Sellers push the price down to $800.
- Same $40 coupon ÷ $800 = 5%.
Bottom line: The price fell, so the yield rose.
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