Investing in bonds: Yield

YIELD is the return that an investor earns on a bond based on the price paid and the interest income received. There are basically three types of bond yields i.e. current yield, yield to maturity and yield to call. Current yield — the annual return on the amount paid for a bond. It is derived by dividing the bond’s interest payment by its current purchase price (instead of face value). Yield to maturity — the anticipated total return on a bond held until maturity. It assumes that all interest payments are received from the date of purchase until the bond reaches maturity. It also assumes that each interest payment is reinvested at the same rate as the original bond. Yield to call — the total return accrued until the call date. Yield to call is calculated in the same way as yield to maturity except that it only considers the total return accrued until call date instead of full maturity. Yield to maturity is usually higher than Yield to call. However, both are considered more meaningful indicators of the actual return one would receive by holding the bond until it matures or is called.

Some bond issuers never intend to pay interest on their bonds until maturity. It may be cheaper for them to call the bonds early and possibly issue a new set of cheaper bonds.

It is advisable that investors also consider the yield to maturity or yield to call when considering bonds to add on to their portfolios.

Buying a bond based only on current yield may be insufficient since it may not represent the bond’s real return.

Investors can seek independent professional advice from a list of SECZ licensed Investment Advisors which is available on the SECZ website: www.seczim.co.zw

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