Bond Yield – Definition, Meaning, Examples, Formula & Accounting Insight

Definition:

Bond yield is the return an investor earns on a bond investment, expressed as a percentage of its current price or face value.

What Is Bond Yield? – Simple Explanation

Bond yield represents the income an investor receives from a bond investment. It is commonly calculated as the annual interest (coupon) divided by the bond’s current market price or face value. The yield helps investors assess the profitability of fixed-income securities and compare them with other investment options.

For example, if you buy a ₹1,000 bond that pays ₹100 annually, your yield is 10%.

Types of Bond Yields

1. Current Yield

Shows the return based on the current market price:

Formula:

$$\text{Current Yield} = \frac{\text{Annual Coupon Payment}}{\text{Current Market Price}} \times 100$$

Current Yield=Current Market PriceAnnual Coupon Payment​×100

2. Yield to Maturity (YTM)

The total return if the bond is held until maturity, including all interest payments and capital gain/loss.
YTM is more comprehensive but involves complex calculations using financial models or tools.

3. Yield to Call (YTC)

Applicable to callable bonds, it's the yield assuming the bond will be called before maturity.

Bond Yield in the Indian Financial System

In India, bond yields play a vital role in the financial and capital markets:

• Government bonds (G-Secs) are benchmark instruments for risk-free rates.

• RBI monitors yields to control monetary policy and interest rates.

• Companies issuing corporate bonds must consider yield trends for pricing.

• In income tax, interest earned on bonds may be taxable under "Income from Other Sources."

Example of Bond Yield Calculation

Let’s say you purchased a corporate bond for ₹950 with a face value of ₹1,000 and annual interest of ₹80.

Current Yield:

$$= \frac{80}{950} \times 100 = 8.42\%$$

                                                                 =95080​×100    = 8.42%

Yield to Maturity would be slightly higher as you will also gain ₹50 upon maturity.

Why Bond Yield Is Important

• Investment Decision-Making: Helps compare bonds with stocks, FDs, etc.

• Risk Assessment: Higher yield may signal higher risk.

• Policy Indicator: Rising yields may indicate inflation or interest rate expectations.

• Valuation Tool: Used in pricing debt instruments in accounting and finance.

Formula Summary

1. Current Yield

$$\text{Current Yield} = \frac{\text{Annual Coupon Payment}}{\text{Current Price}} \times 100$$

Current Yield=Current PriceAnnual Coupon Payment​×100

2. Yield to Maturity (YTM)

Complex formula involving:

$$\text{YTM} = \left(\frac{C + \frac{F - P}{n}}{\frac{F + P}{2}}\right) \times 100$$

YTM=(2F+P​C+nF−P​​)×100

Where:
C = Annual Coupon Payment
F = Face Value
P = Purchase Price
n = Years to Maturity

Accounting Journal Entry for Bond Interest

Assume a company receives ₹10,000 as interest from bonds:

Journal Entry:

Bank A/c                          Dr ₹10,000  
   To Interest Income A/c              ₹10,000

If accrued but not yet received:

Accrued Interest A/c             Dr ₹10,000  
   To Interest Income A/c              ₹10,000

Accounting Illustration – Real-Life Example

Scenario:
A company holds ₹1,00,000 worth of government bonds (10% interest), purchased at ₹95,000.

Annual Interest Income = ₹10,000

Accounting at Year-End:

• To record interest income:

Bank A/c                          Dr ₹10,000  
   To Interest Income A/c              ₹10,000

• To record bond at amortized cost (if held-to-maturity):

Investment in Bonds A/c          Dr ₹5,000  
   To Profit on Investment A/c         ₹5,000

This ₹5,000 is the capital gain on bond redemption (₹1,00,000 - ₹95,000).

Legal Implications & Real-World Use

• SEBI regulates bond yield disclosures for listed companies.

• RBI uses yield curves to assess economic health.

• Bonds in India may be taxable or tax-free (e.g., tax-free infrastructure bonds).

Related Terms

• Coupon Rate
• Face Value
• Market Value
• G-Sec
• Yield Curve
• Accrued Interest
• Discount and Premium on Bonds

FAQs on Bond Yield

Q1. Is bond yield taxable in India?

Yes. Interest from most bonds is taxable under Income from Other Sources, except certain tax-free bonds.

Q2. What is a good bond yield?

Depends on inflation and risk. Generally, higher than FD rates but lower than equity returns.

Q3. Does bond yield increase with bond price?

No. Bond yield and bond price move inversely.

Q4. How does RBI influence bond yield?

By changing repo rates and conducting open market operations, RBI influences bond demand and yields.

Q5. What is the difference between coupon and yield?

Coupon is the fixed interest rate; yield depends on market price.

Expert Tip by Learn with Manika

Always analyze the yield-to-maturity (YTM) instead of just the current yield. YTM gives a full picture, especially when investing in long-term or discounted bonds.