Bond Yield in India

Bond yield in India depends on the interest rate and price of bonds in the market. As a result, fluctuations in the interest rate and bond price lead to a change in the bond yield. Inflation significantly affects the bond yield with increased interest rates and a fall in the bond price. For instance, a 10-year bond with a long maturity period will likely be more affected by inflation due to a decrease in real return. 

What Is Bond Yield?

Bond yield is the annualised return that investors receive from the issuer. It varies based on the coupon rate and price of bonds and is expressed as a percentage. It includes fixed-interest income, the current market price of the bond and other related terms such as discount and prepayment penalty fees. 

A bond is a loan that companies take from investors and pay interest periodically. Additionally, the company pays back the principal amount of the maturity of the bond. Thus, bond yield is the company's borrowing cost that the investor receives. 

Historical Data of 15-year Bond Yield in India

The following is a 15-year bond yield in India chart, presenting historical trends. Take a look:

Bond Yield Formula

There are two ways to calculate bond yield as follows:

1. Standard Bond Yield

In the case of fixed-rate bonds, the interest rate that you earn is the coupon rate. This coupon rate remains fixed from the time of issuance of bonds. Here is how to calculate bond yield in such a case:

Bond Yield = Annual Coupon Payment/Face Value of the Bond

2. Current Yield

The current yield is the rate of return that investors can expect to earn in the following year. This yield varies based on the price of the bond. When there is an increase in the price of a bond, the bond yield decreases. Similarly, when the price of a bond falls, the bond yield increases. 

Here is the formula to calculate the current yield of a bond:

Current Yield = Annual Coupon Payment/Market Price of the Bond

What Is the Relationship Between Bond Yield and Bond Price?

Bond yield and bond price have an inverse relationship. When the bond price increases, the bond yield falls. Further, when the price of a bond decreases, the bond yield rises. 

Moreover, the interest rate of bonds significantly affects the yield of bonds. When there is an increase in the interest rate, bond price falls resulting in an increase in bond yield. Similarly, a decrease in the interest rate leads to an increase in the bond price and a decrease in the bond yield. 

For instance, in case of an inflationary trend in India, the interest rates will increase. This will result in a fall in bond prices and a rise in bond yield in India.

What Is Yield to Maturity?

If an investor holds a bond till maturity, the rate of return he/she receives is the yield to maturity. This includes reinvestment of all interest payments, the capital invested, the par value and maturity. You can use yield to maturity to compare multiple bonds with different maturity tenures and coupons. 

Notably, yield to maturity is not the real yield earned from a bond. This is because it excludes the yield related to the payback of the principal amount and assumes the reinvestment of coupon payments at a rate the same as the yield to maturity. 

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