bond yield — precise definition && example

* yield for a given bond (with a given maturity) is used to discount payout(s) and derive a fair price, aka present value or PV.

* it’s easy to derive price or yield from each other

* yield looks like an annual return, semi-compounded. eg 10% pa, but a coupon rate often looks like $102 pa.

* yield is about the only usable metric to compare bonds across maturities, coupon rates and face values.

* See the posts on discount factor, and how it discounts cash flows. Now, for math-challenged bond traders ;-), we simply assume the discount factor is consistent for every duration. So we discount every income using the same formula —
** cashflow[1] is discounted by 1/(1+10%/2)(1+10%/2) ie twice
** cashflow[1.5] is discounted by 1/(1+10%/2)(1+10%/2)(1+10%/2) ie 3 times
** see link

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