bond yield
Bond yield is the actual return a bond gives you each year based on what you paid for it, which can be higher or lower than the interest rate printed on it.
In plain English
Here is the surprising part. When bond prices go up, bond yields go down. Most people expect the opposite, since we are used to thinking that if something is doing well, the returns should be climbing too. Bonds work the other way round, and once you see why, a lot of financial news starts making sense.
A bond is really just a loan. Say the Nigerian government issues a bond that promises to pay ₦10,000 per year in interest on a bond that costs ₦100,000. That is a 10% rate, fixed, printed on the bond forever. But bonds get bought and sold after they are issued, and their prices move like any other asset. If everyone suddenly wants that bond and its price rises to ₦120,000, the ₦10,000 interest payment stays the same, but now it is only 8.3% of what you paid. Your yield dropped, even though nothing about the bond itself changed.
Now flip it. If interest rates in the economy rise, new bonds start offering better rates, and nobody wants the old ₦100,000 bond paying only 10% anymore. Its price falls, maybe to ₦85,000, and that same fixed ₦10,000 payment now works out to nearly 11.8% yield. The bond became more attractive to buy precisely because its price fell.
This matters for anyone with a pension fund in Nigeria, since PFAs hold a lot of government bonds, and it matters for someone in London watching UK gilt yields to decide whether it is finally worth locking money into a safer asset instead of chasing riskier stocks. Yield is the honest number. The coupon rate is just the label on the tin.
So when someone asks whether a bond is a good buy, the coupon rate alone will not tell you. You need to know what price you are actually paying for it today, because that is what decides your real return.
A bond pays a fixed ₦8,000 yearly on a ₦100,000 face value, an 8% coupon rate. If you buy it later at a discounted price of ₦90,000, you still receive the same ₦8,000 each year, but your yield is now 8,000 divided by 90,000, which is about 8.9%.
Questions people ask
Is a higher bond yield always better?
Not automatically. A higher yield often means the bond's price has dropped, which can happen because the market sees more risk in the issuer, perhaps worry about whether a government or company can repay. Higher yield can mean higher reward, but it can also mean higher risk, so check why the yield is high before celebrating.
Why do bond yields rise when interest rates rise?
Because new bonds get issued at the higher prevailing rate, older bonds with lower fixed payments become less attractive, so their prices fall to compensate buyers, which pushes their yield up until it competes fairly with the new bonds.
Does bond yield matter if I just hold the bond until it matures?
Less so for your own cash flow, since you will receive the fixed payments and your principal back regardless of price swings in between. But yield still matters if you ever need to sell early, or if you are comparing this bond to other investments before you buy.
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