The return a bond provides to an investor is measured at the yield, which is defined as the percentage.
Current yield is often quoted yield calculation is used to estimate the bond yield for one year. It only accounts for the interest, or coupon payments, bond returns to the investors. This yield is calculated as the coupon rate of a bond divided by its current market price, but it does not take into account capital gains or losses when the bond is sold. If the bond is not sold within years, this yield calculation will provide the bondholder with an accurate assessment of his or her return.
The only way, the current yield on bonds can be negative, with this basic assessment, if the investor were receiving negative interest payments, or if the bond somehow had a market value below $0 – both of which are very unlikely.
Other calculations of yield will take into account various factors, and can be used to better measure the return an investor can get, given the various events.
As its name suggests, the yield to maturity (yield) returns the yield (expressed as a percentage per annum) for the bonds, if the investor will hold the bond to maturity. This formula takes into account all coupon payments and the face or nominal value for the bonds (provided that the basic default settings), and it can be seen as a more complete assessment than current yield. However, the calculation of the bond yield is complex and involves trial and error. This is typically done using business programmable calculator, but you may also do approximate profitability using the table of bond yields.
Consider this example: let’s say the investor pays $800 for a bond that has exactly two years to maturity, a par value of $1,000 and interest payments of $8 a year. Using the table of bond, we could determine that the bonds will have a yield of approximately 10.86%. If the bondholder paid $ 1,200 for bonds, the yield will be about -9.41%. (It should be noted, however, that communication does not necessarily have a negative real return, just because the investor paid more than face value for it.)
When you use yield calculation, it is possible to have a negative yield on the bonds largely depends on how much you initially pay for the bond and time to maturity.
The yield can be calculated using different formulas (there are many more than the two mentioned here), and depending on the formula used, you may end up with drastically different yields. To learn more, see our bonds basics Tutorial, advanced concepts of bonds and rising bond yields with Loading.