Differences Between Interest Rates and Bond Yields?
Interest rates typically refer to annual interest owed on a loan. Bond yields refer to what an investor expects to earn, which often times are different from the interest rates because bonds once in the market, could be traded at prices different from their nominal values.
For example, a bond with face value of $1,000 and 10% interest rate. If it's traded at $1,000, then its yield is 10%. If the bond's price falls to $900, buying it would give the buyer a current yield of 11.1%. If an investor buys it at $1,100, the yield will dip to 9.1%.
From this example, we could see that a bond's price and yield move in opposite directions.
In our next blog post, we will discuss the relationships between interest rates and economy and inflation.