What is a bond yield? A beginner's guide

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What is a bond yield?

A bond yield is the annual return an investor earns from a bond, expressed as a percentage of the bond's current market price. When a government or company issues a bond, it agrees to pay the holder regular interest, known as the coupon, plus the original loan amount, called the face value or par value, back at a set date known as maturity. In the UK, government bonds are called gilts. In the US, the equivalent is called Treasuries. Bonds issued by companies are known as corporate bonds. According to interactive investor (ii.co.uk, 2026), the coupon is fixed at issue and never changes, but the yield moves constantly because it is calculated against the bond's current trading price, not its original price.

Bond yield vs bond price: the inverse relationship

Bond prices and yields always move in opposite directions. According to FINRA (Understanding Bond Yield and Return), as the price of a bond rises, its yield falls, and as the price falls, its yield rises. This happens because the coupon payment is fixed in pounds, so when the price paid for the bond changes, the percentage return implied by that fixed payment changes with it.

For example, a bond with a £1,000 face value and a 5% coupon pays £50 a year regardless of what happens to its price. If demand pushes the market price up to £1,250, that same £50 payment now represents a yield of 4% (£50 divided by £1,250). If the price instead falls to £800, the yield rises to 6.25% (£50 divided by £800). This illustrative example is for explanation only and does not reflect any specific bond.

How is bond yield calculated?

There is no single bond yield figure. Investors use a few different calculations depending on what they want to know, and the two most common are current yield and yield to maturity.

Current yield

Current yield is the simplest measure. It divides the bond's annual coupon payment by its current market price. Current yield looks only at income received this year and ignores any gain or loss an investor would make if they held the bond until it matures.

Yield to maturity (YTM)

Yield to maturity, or YTM, is a more complete figure. It estimates the total annual return an investor would earn if they bought the bond today and held it until maturity, factoring in the coupon payments, the price paid, and the difference between that price and the face value repaid at the end. YTM is the number most often quoted on broker platforms and financial news because it reflects the full picture rather than a single year of income.

Past performance is not a reliable indicator of future results. The rate and yield figures above are historical snapshots and will change over time.

What affects bond yields?

Bond yields respond to a small number of forces, and understanding them helps explain why gilt yields make the news alongside interest rate decisions.

Interest rates and central bank policy

When a central bank such as the Bank of England raises or holds its policy rate, newly issued bonds tend to offer yields in line with that rate, which affects demand for older bonds paying a different coupon. The Bank of England held Bank Rate at 3.75% at its meeting ending 29 July 2026, with three of nine committee members voting for a rise to 4%, according to the Bank of England's own Monetary Policy Summary.

Credit risk and issuer quality

The more likely an issuer is seen to default, the higher the yield investors demand as compensation. This is why corporate bonds from lower rated companies, sometimes called high yield bonds, pay more than government bonds from economically stable countries.

Inflation expectations

A fixed coupon buys less in real terms if inflation rises, so investors typically demand higher yields when they expect inflation to increase, and accept lower yields when they expect it to fall. This is one reason gilt yields moved sharply higher during 2026 alongside energy price volatility, according to Trading Economics market commentary.

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What is a yield curve, and why does it matter?

A yield curve plots the yields of bonds from the same issuer across different maturities, from short term bills to 30 year bonds, on a single chart. Under normal conditions the curve slopes upward because investors expect more compensation for locking money away for longer, largely reflecting inflation expectations further out, as the Reserve Bank of Australia's investor education material explains. When short term yields rise above long term yields, the curve is described as inverted, which some economists watch as a signal of economic slowdown risk. A flat or inverted curve does not guarantee any particular economic outcome, and this is not a prediction of future events.

Government bonds vs corporate bonds: yield differences

Government bonds and corporate bonds are both fixed income instruments, but they typically carry different yields for a simple reason: credit risk.

For a deeper look at how corporate bond yields are assessed, see IG's guide to what corporate bonds are and how to buy them, and IG's separate explainer on what government bonds are and how they work.

Why bond yields matter for investors

Bond yields matter beyond the bond market itself. Rising gilt yields tend to push up UK fixed rate mortgage pricing because lenders price mortgages off swap rates that track gilt yields, not directly off Bank Rate. Bond yields also influence how equities are valued, since a higher yield on a low risk government bond can make it a more attractive alternative to riskier assets like shares, all else being equal. Some investors compare a company's dividend yield against prevailing bond yields when deciding how to allocate between income producing shares and bonds, although the two are calculated differently and carry different risks. See IG's guide on the differences between stocks and bonds for more on this comparison.

How to track and use bond yields

Investors typically follow bond yields in two ways. Some buy bonds directly, or via funds, to hold as part of a diversified portfolio and collect the yield as income over time. Others use a Contract for Difference (CFD), a derivative that lets a trader speculate on the price movement of a bond market without owning the underlying bond, to take a short term view on where yields might move next.

Trading bond prices via CFDs involves leverage, which means losses can exceed your initial deposit. This is a materially different risk profile from holding a bond to maturity, where a UK government bond's income and repayment at maturity are backed by the government (subject to it not defaulting), and specific risks such as liquidity risk and interest rate risk should be understood before trading.

Summed up

• A bond yield is a bond's annual return expressed as a percentage of its current market price.
• Bond prices and yields move in opposite directions.
• Current yield looks at income today; yield to maturity looks at total return if held to maturity.
• Interest rate policy, credit risk and inflation expectations are the main drivers of yield movements.
• Government bonds generally yield less than corporate bonds because they are considered lower risk.

FAQ

Past performance is not a reliable indicator of future results.

Tax treatment depends on individual circumstances and may be subject to change. Seek independent advice.

Figures correct as of the sources and dates cited above. Rate, yield and market size figures change over time; verify against the original source before relying on them.