Calculating the Yield
Calculating the yield at any time is based on the assumption that the bonds are held until their maturity date, and that all coupons (plus the face value) are received on the maturity date.
If the bond is sold prior to its maturity date, however, the bondholder will not receive the face value, but only the price received for the bond on the stock exchange. As indicated above, this price can be higher or lower than the face value.
There is therefore no guarantee that the listed yield (or “the guaranteed yield”) as calculated on the day the bond has been purchased will be received.
A larger amount will be received in some cases, and a lesser amount in others depending on the market price of the bond on the sale date.
Definition of Yield and Yield to Maturity
The term “yield” is used mostly for bonds with durations up to one year, and for bank deposits. The term “yield to maturity” is customarily used for bonds with durations of more than one year.
Theoretical Graph of a Bond
This theoretical graph is designed for purposes of explanation and study. A theoretical graph is the graph that could normally be expected whenever the economic data remains unchanged over the life of the bond. For any bond other than T-bills and Treasury Strips, the price on the issue date in the theoretical graph is $1,000.