Understanding Yields

Basically, there are two types of bond yields: current yield and yield to maturity. Current yield is the annual return on the dollar amount paid for a bond. Yield to maturity is the rate of return you receive by holding a bond until it matures. It equals the interest you receive from the time you purchase the bond until maturity, plus any gain or loss depending on whether the bond’s value has increased or decreased.

Tax-exempt yields are usually stated in terms of yield to maturity, with yield expressed at an annual rate. If you purchase a bond with a 6.0% coupon at par, its yield to maturity is 6.0%. If you pay more than par, the yield to maturity will be lower than the coupon rate. If purchased below par, the bond will have a yield to maturity higher than the coupon rate. When the price of a tax-exempt bond increases above its par value, it is said to be selling at a premium. When the security sells below par value, it is said to be selling at a discount.

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