What a bond pays against its price:when one goes up, the other's sliced.
The income return on an investment, usually expressed as a percentage.
In forex, yield differences between countries drive currency flows as traders seek higher returns through carry trades.
In plain words
Yield is the income an investment pays in a year, expressed as a percentage of its price. For a bond, which pays a fixed amount of interest, the yield a new buyer receives depends on the price paid: the lower the price, the higher the yield.
See it move
Bond price outweighs Yield
Why it matters
Government bond yields reflect the interest rates the market expects in a currency. Differences in yield between countries are one of the influences on exchange rates, because money tends to be drawn towards higher returns, and they underlie the carry trade, in which a trader holds a higher-yielding currency against a lower-yielding one.
Worked example
An example only. The figures are round and invented for the arithmetic: they are not market prices.
A bond pays a fixed 50 a year and trades at 1,000; yield is taken here in its simplest form, income divided by price.
- 1At a price of 1,00050 ÷ 1,000 = 5%.
- 2If the price drops to 80050 ÷ 800 = 6.25%.
- 3If the price climbs to 1,25050 ÷ 1,250 = 4%.
The payment never changed; the yield moved from 5% to 6.25% or to 4% only because the price did.
A common mistake
A higher yield is not simply a better deal. Yields are often higher because investors see more risk, such as inflation, default or a weakening currency, and a currency loss can outweigh the extra interest.
Check yourself
Educational information, not investment advice or a recommendation to trade.