pay back its face value as well as its last interest payment. Combining the bond’s face value, interest rate, and

maturity date, and market interest rates, allows a buyer to compute a bond’s present value, which is the most

that a buyer would be willing to pay for a given bond. This may or may not be the same as the face value.

The bond yield measures the rate of return a bond is expected to pay over time. Investors can buy bonds when

they are issued and they can buy and sell them during their lifetimes. When buying a bond that has been

around for a few years, investors should know that the interest rate printed on a bond is often not the same as

the bond yield, even on new bonds. Read the next Work It Out feature to see how this happens.

WORK IT OUT

Calculating the Bond Yield
You have bought a $1,000 bond whose coupon rate is 8%. To calculate your return or yield, follow these steps:

1. Assume the following:

Face value of a bond: $1,000

Coupon rate: 8 %
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