What Is Yield in Bonds and How Is It Calculated?

When you begin exploring bond investments, one term you’ll frequently encounter is “yield.” Understanding what it means and how to calculate it can help you make smarter investment decisions—especially in India’s growing bond market.

In this article, we’ll simplify what yield in bonds really means, how it differs from the coupon rate, the types of yields that matter, and most importantly—how you can calculate bond yield using Excel, even in older versions like Excel 2007.

What is Bond Yield?

Yield refers to the return you earn from a bond investment, expressed as a percentage of what you paid to purchase it.

While many investors confuse yield with the interest rate (coupon), they’re not the same. The coupon is fixed when the bond is issued, while the yield fluctuates depending on the bond’s market price.

Yield vs. Coupon Rate – What's the Difference?

Let’s break it down with an example:

• A bond has a face value of ₹1,000
• Annual coupon (interest) = ₹70
• Coupon rate = 7% (i.e. ₹70 ÷ ₹1,000)

Now, if:

• You buy the bond at ₹1,000 → yield = 7%
• You buy the bond at ₹950 → yield > 7%
• You buy the bond at ₹1,050 → yield < 7%

This is because your investment cost changes, but the interest remains the same. That’s why yield gives a more accurate picture of your return.

Why is Yield Important?

Yield helps you:

• Understand your real earnings from a bond
• Compare different bonds and investments
• Make smarter decisions based on risk-return trade-off

In the secondary market, where bonds are bought and sold before maturity, price changes affect the yield, making it a crucial metric.

Types of Bond Yield (with Excel formulas)

Let’s explore the most important types of yields investors should know—and how to calculate each one in Excel 2007.

1. Current Yield

Definition: It shows the return you earn on a bond based on its current market price.

Formula:

=Annual_Interest / Current_Market_Price

Example:

If:

• Annual Interest = ₹70 (in cell B2)
• Current Market Price = ₹950 (in cell C2)

Then:

=B2 / C2

To convert to a percentage:

=(B2 / C2) * 100

So your current yield would be 7.37% if you bought the bond at ₹950.

2. Yield to Maturity (YTM) – Approximate Method

Definition: YTM estimates the total return you'll earn if you hold the bond till maturity. It includes both annual interest and any gain/loss on purchase price.

Excel 2007-Compatible Formula:

=(Annual_Interest + (Face_Value - Purchase_Price) / Years_To_Maturity) / ((Face_Value + Purchase_Price) / 2)

Example:

Let’s say:

• Annual Interest = ₹70 (in B2)
• Face Value = ₹1,000 (in C2)
• Purchase Price = ₹950 (in D2)
• Years to Maturity = 5 (in E2)

Then the formula becomes:

=(B2 + (C2 - D2)/E2) / ((C2 + D2)/2)

To show it as a percentage:

=((B2 + (C2 - D2)/E2) / ((C2 + D2)/2)) * 100

Your YTM = 8.21%, meaning that’s your annualized return if held till maturity.

3. Yield to Maturity Using Built-In Excel Function

If you want a more accurate YTM based on actual dates, you can use Excel's built-in YIELD function.

Syntax (Excel):

=YIELD(settlement, maturity, rate, pr, redemption, frequency, basis)

• settlement = Purchase date (e.g., DATE(2024,1,1))
• maturity = Maturity date (e.g., DATE(2034,1,1))
• rate = Coupon rate (e.g., 0.07)
• pr = Purchase price per ₹100 face value (e.g., 95)
• redemption = Face value (usually 100)
• frequency = 1 (annual), 2 (semi-annual)
• basis = 0 (Actual/Actual)

Example:

=YIELD(DATE(2024,1,1), DATE(2034,1,1), 0.07, 95, 100, 1, 0)

This returns YTM as a decimal. Multiply by 100 to get the percentage.

4. Bond Price from Yield – Use the PRICE Function

Want to know how much a bond is worth if you want a specific yield? Use the PRICE function.

Syntax (Excel 2007):

=PRICE(settlement, maturity, rate, yld, redemption, frequency, basis)

Example:

=PRICE(DATE(2024,1,1), DATE(2034,1,1), 0.07, 0.0821, 100, 1, 0)

This will tell you the market price per ₹100 face value.

Relationship Between Price and Yield

There’s an inverse relationship between bond prices and yield:

• When price increases, yield decreases
• When price falls, yield increases

That’s because the interest payout stays the same, but your investment amount changes.

Example:

A bond pays ₹70 annually.

• Bought at ₹1,000 → Yield = 7%
• Bought at ₹900 → Yield = 7.78%
• Bought at ₹1,100 → Yield = 6.36%

Understanding this helps you decide when to buy or sell a bond in the secondary market.

Factors that affect bond yield

A few key things impact the yield on a bond:

1. Interest Rates

If RBI increases repo rates, new bonds offer higher returns, and existing bond prices fall, increasing their yield.

2. Credit Rating

Lower-rated bonds need to offer higher yields to attract investors. Higher-rated bonds, like government bonds, offer lower yields due to low risk.

3. Inflation

If inflation rises, investors demand higher yields to maintain real returns.

4. Supply & Demand

More demand → higher price → lower yield

Less demand → lower price → higher yield

Yield on Tax-Free Bonds vs Taxable Bonds

Sometimes a tax-free bond may offer a lower coupon but still give you better post-tax returns.

Example:

• Taxable bond interest = 9%
• Tax-free bond interest = 6.5%
• Tax slab = 30%

Post-tax return from taxable bond =

9% - (30% of 9%) = 6.3%

So even though the tax-free bond has a lower coupon, it offers a higher effective return for high-income investors.

Final Thoughts

Bond yield is one of the most important indicators of how much return you're earning from your investment. Whether you're buying in the primary market or from the secondary market, knowing how to calculate and compare yields helps you choose the right bond for your needs.

And the best part? You don’t need to be a finance expert. With Excel 2007, you can calculate all key types of yields easily using the formulas provided above.

At MeraDhan, our goal is to simplify bond investing. From understanding basic terms to comparing yield performance, we help you make confident and informed investment decisions.

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Visit MeraDhan today to explore bonds by yield, credit rating, and issuer category. Make your money grow—safely and smartly.