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Bond Yields Explained: A Step-by-Step Guide for Investors

Post Date : July 10, 2025

Bond yields may sound complex, but understanding them is crucial for every Indian investor—whether you’re investing in government securities (G-Secs), corporate bonds, or debt mutual funds. In this guide, we’ll break down bond yields into simple terms, explain how they affect your investment returns, and why they’re a key part of India’s fixed-income market.

What Are Bonds?

A bond is essentially a loan you give to an entity (government, company, etc.) in exchange for regular interest payments and the return of your principal at maturity. Bonds are fixed-income instruments, meaning they pay a predictable stream of income—unlike equities, which may or may not pay dividends.

What Is a Bond Yield?

Bond yield is the return an investor earns on a bond. While the coupon rate (fixed interest rate) tells you how much income you’ll receive, the yield tells you how much return you’re making on your investment based on the current market price of the bond.

Yield ≠ Coupon

The coupon is fixed. The yield changes as the bond’s market price changes.

Step-by-Step: How Bond Yield Works?

Step 1: Understand the Coupon Rate

This is the fixed annual interest paid on a bond.
Example: A bond with ₹1,000 face value and 7% coupon rate pays ₹70/year.

Step 2: Know the Market Price of the Bond

Bonds are traded in the secondary market, and their prices fluctuate with demand, interest rate changes, and credit risk.

• If interest rates rise → bond prices fall
• If interest rates fall → bond prices rise

Step 3: Calculate the Current Yield

Current Yield = Annual Coupon Payment/ Current Market Price of the Bond ×100

Example:

Bond face value = ₹1,000
Coupon = ₹70
Current market price = ₹950

Current Yield= (70/950) ×100=7.37%

This means even though the bond pays 7%, you’re earning 7.37% because you bought it at a discount.

Types of Bond Yields

Importance of Bond Yield

1. Interest Rate Signals

Bond yields reflect expectations around RBI’s interest rate moves. If yields rise, markets expect interest rates to go up.

2. Debt Fund Returns

If you invest in debt mutual funds, their NAVs are sensitive to bond yield changes. When yields go up, bond prices fall, and so do NAVs.

3. Government Borrowing Costs

The yield on 10-year G-Secs is a key benchmark. Higher yields mean the government pays more to borrow money.

4. Investment Strategy

Rising yields may be a good time to lock in higher returns. Falling yields could mean it’s time to go short-term or stay liquid.

What Affects Bond Yields in India?

• Repo Rate – RBI’s benchmark lending rate
• Inflation – Higher inflation = higher yields
• Liquidity in Banking System – More liquidity = lower yields
• Fiscal Deficit & Borrowing – High govt borrowing = higher yields
• Global Cues – US Fed rate decisions, crude oil prices, etc.

How Indian Investors Can Use Bond Yields

• Debt Fund Investors – Use YTM to compare funds before investing
• Gilt Investors – Monitor 10-year G-Sec yield for timing
• Corporate Bond Buyers – Check credit spreads over G-Secs for risk premium
• NPS/EPF Subscribers – Understand long-term return expectations
• Retired Individuals & Income Seekers – Consider yields when investing in RBI bonds, NCDs, etc.

FAQs on Bond Yields

1. What is a good bond yield in India today?

It depends on the bond type. Government bonds (10-year G-Sec) typically yield around 7–7.5%, while AAA-rated corporate bonds offer slightly higher yields. Anything significantly above that involves higher risk.

2. How do rising interest rates affect bond prices?

When interest rates go up, existing bond prices fall, since newer bonds offer higher returns. This causes yields to rise on older bonds.

3. What is YTM and why is it important?

YTM (Yield to Maturity) is the total return you’ll earn if you hold the bond until it matures. It considers both interest income and capital gain/loss.

4. Do mutual fund investors need to track bond yields?

Yes. Bond yield movements affect the NAV of debt mutual funds. For example, long-duration funds are more sensitive to interest rate changes.

5. Where can I check live bond details?

You can check on:

• RBI’s official website
• NSE, BSE, NSDL or CDSL bond market pages
• AMFI debt fund factsheets

Need Help?

Contact RMoney at 0562-4266600 or askus@rmoneyindia.com

Our team will help you invest in government securities, corporate bonds, or mutual funds based on your goals.

Disclaimer: This Blog is for educational purposes only and does not constitute investment advice. Always consult with a financial advisor before making trading decisions.