Whats the difference between interest rate and Yield?
Bonds can be an excellent investment for those investors looking to generate income. Bonds are debt instruments that make interest payments to their holders. The interest rate varies according to the maturity date of the bond and the credit rating of the issuer. The annual rate of return on a bond is known as its yield. A bond’s yield is different from its coupon rate in that a bond’s yield fluctuates according to price of the bond, while a bond’s coupon, or interest rate remains, the same for the life of the bond. In other words, a $1,000 bond paying 10% interest would have an annual yield of $100 or 10%. However, if the bond sells for $1,100, it still has a 10% coupon, but the yield drops to 9% ($100/$1,100 = .09 or 9%). Conversely, if the price of the bond were $900, it still pays a 10% interest rate, but the yield goes up to 11% ($100/$900 = .11 or 11%). The relationship between a bond’s price and its yield is an inverse relationship. In other words, as the price of a bond goes up
