Home > Financial Markets, Interest Rates > Bond Yields before and after Bailouts

Bond Yields before and after Bailouts

November 18, 2011 Leave a comment Go to comments

I quite like this graphic from the WSJ showing bond yields before and after the bailout. Remember that a yield is a figure that shows the return you get on a bond. The simplest version of yield is calculated using the following formula: yield = coupon amount/price. When you buy a bond at par, yield is equal to the interest rate. When the price changes, so does the yield.

Say an American Treasury (government) bond with an 8.125% coupon rate payable at $100 (par value) was trading at $103. In return for the $103 outlay, a buyer would receive the coupon payment of $8.125 (that’s 8.125/103 = 7.8% current yield). What usually holds is that:

Discount rate (price below par) – Coupon Rate less than Current Yield
Premium rate (price above par) – Coupon Rate greater than current Yield
Par Value (price = par) – Coupon Rate = Current Yield

So let’s apply this to the graph below. Because the risk associated with buying Greek Bonds, the trading price is very low which means that its current yield is correspondingly high. Notice that the current yield on Irish bonds has started to fall as the market believes its austerity measures – including dropping the minimum wage – is working.

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