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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.
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
Type of Yield |
What It Means |
Current Yield |
Annual return based on coupon and current price. |
Yield to Maturity (YTM) |
Total return if the bond is held till maturity—includes interest and price gain/loss. |
Yield to Call (YTC) |
Return if the bond is redeemed before maturity (applicable for callable bonds). |
Importance of Bond Yield
Bond yields reflect expectations around RBI’s interest rate moves. If yields rise, markets expect interest rates to go up.
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.
The yield on 10-year G-Secs is a key benchmark. Higher yields mean the government pays more to borrow money.
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?
How Indian Investors Can Use Bond Yields
FAQs on Bond Yields
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.
When interest rates go up, existing bond prices fall, since newer bonds offer higher returns. This causes yields to rise on older bonds.
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.
Yes. Bond yield movements affect the NAV of debt mutual funds. For example, long-duration funds are more sensitive to interest rate changes.
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