Various factors affecting bond yields

The yield of a bond represents its rate of return, which changes with the coupon rate and bond price. Whilst the coupon rate is often fixed, the price fluctuates in response to changes in interest rate, market supply and demand, the remaining time to maturity and credit quality of the bond. Therefore, upon issuance, a bond usually trades at a premium or discount in the market.  Bond yield is commonly classified into current yield and yield to maturity.

Current yield

It is the annualised rate of return calculated by dividing the current annual coupon of a bond by its price. If a bond is purchased at par value, then its current yield will equal the coupon rate. However, if the bond is bought at a discount to par value, its current yield will be higher than the coupon rate. Conversely, when the bond is bought at a premium, current yield will be lower than the coupon rate.

Yield to maturity

It is the total return an investor can receive from a bond held to maturity. It is expressed as an annualised rate of return, which includes potential interest gain or loss incurred from the time of purchase, up to maturity and the capital of the bond, taking into account any movements in price. Yield to maturity is a better measure of return compared to current yield due to the fact that it reflects the expected total return on a bond if it is held to maturity.