Finance Formulas / July 7, 2018 / Tatiana Douglas
You can use the bond yield formula to determine the return you’ll realize by holding a bond to maturity. The required yield, conversely, is the return a bond must offer to make it worthwhile to investors, and it’s usually the same yield offered by other plain vanilla bonds in the market with similar credit quality and maturity. Once you’ve decided on the required yield, you can figure out the yield.
When you calculate the price of a bond, you are determining the maximum price you would want to pay for the bond, based on how its coupon rate compares to the average rate most investors are currently receiving in the bond market. Due to default risk, investors may require a higher rate of return than the prevailing risk-free rate. In general, the greater the default risk on a given bond issue, the higher the required rate of return.
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