How to Convert Bond Price to Yield

A bond’s interest payments are based on its annual interest rate, or coupon rate, and its face, or par, value. While the coupon remains fixed, a bond’s market price fluctuates to reflect changes in market rates, among other variables. You can calculate a bond’s current yield to figure your annual percentage return based on its annual interest and market price. If a bond sells for a premium, or higher than face value, its yield will be lower than its coupon. A bond that sells at a discount to face value generates a yield that is higher than its coupon.

Step 1

Find out a bond’s price, coupon rate and par value from your broker, in a financial newspaper or in the Market Data section of the Financial Industry Regulatory Authority’s website. Bond prices are typically quoted as a percentage of par value. For example, assume a 20-year corporate bond pays a 5 percent coupon rate, has a $1,000 par value and shows a price of 104.89. This means its price is 104.89 percent of its par value.

Step 2

Divide the price by 100. Multiply your result by the bond’s par value to determine its price in dollars. In this example, divide 104.89 by 100 to get 1.0489. Multiply 1.0489 by $1,000 to get a price of $1,048.90.

Step 3

Multiply the bond’s coupon rate by its par value to determine its annual interest. In this example, multiply 5 percent, or 0.05, by $1,000 to get $50 in annual interest.

Step 4

Divide the bond’s annual interest by its price to convert the price to a yield. In this example, divide $50 by $1,048.90 to get 0.0477.

Step 5

Multiply your result by 100 to calculate the bond’s yield as a percentage. Concluding the example, multiply 0.0477 by 100 to get a 4.77 percent yield. This means the bond’s annual interest equals 4.77 percent of its market price. This yield is lower than its 5 percent coupon because its sells at a premium to par value.

Warning

  • The current yield relies only on a bond’s interest payments and does not factor in the repayment of par value when the bond matures.

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