Bond yield, coupon and price explained simply

A bond is a loan you give to a company, a bank or the state. In return, the issuer promises to pay you interest along the way and to repay the loan on a set date. Three words come up every time you look at a bond: coupon, price and yield. They are connected, and once you see how, bond pages on the Tashkent Stock Exchange (UZSE) become much easier to read.

The basic terms of a bond

Every bond is described by a few terms that are fixed when it is issued:

• Face value (nominal). The amount the issuer promises to repay at the end. Coupons are calculated on this amount.
• Coupon rate. The annual interest rate paid on the face value. Some bonds have a fixed rate; others have a rate set by a formula, for example linked to a reference rate.
• Coupon frequency. How often coupons are paid: monthly, quarterly, twice a year or once a year.
• Maturity date. The date on which the issuer repays the face value and the bond ends.

Here is a hypothetical example. A company issues a bond with a face value of 1,000,000 UZS, a fixed coupon of 10% a year paid once a year, and a maturity of three years. If you hold it to the end, you receive 100,000 UZS each year and then 1,000,000 UZS back at maturity, provided the issuer pays as promised.

Coupon rate and yield are not the same thing

The coupon rate never changes for a fixed-rate bond. It is written into the bond's terms. The yield, on the other hand, depends on the price you pay.

If you buy the bond above at exactly its face value, 1,000,000 UZS, your yield is 10% a year, the same as the coupon. But bonds trade on the exchange after they are issued, and their prices move. If you buy the same bond for less than face value, you still receive the same coupons and the same 1,000,000 UZS at the end, so your return on the money you paid is higher. If you pay more than face value, your return is lower.

Two common measures of yield:

• Current yield = annual coupon ÷ price × 100%. If you buy the bond for 950,000 UZS, the current yield is 100,000 ÷ 950,000, about 10.5%. This measure ignores the gain or loss you make at maturity.
• Yield to maturity (YTM) includes both the coupons and the difference between what you paid and what you get back at the end. It is the single annual rate that makes all future payments worth exactly the price you pay today.

A hypothetical YTM example: a bond with two years left, face value 1,000,000 UZS and a 10% annual coupon costs 950,000 UZS. You receive 100,000 UZS after one year and 1,100,000 UZS after two years. A common shortcut estimates the yield as the annual coupon plus the yearly share of the discount, divided by the average of the price and face value: (100,000 + 25,000) ÷ 975,000, about 12.8%. The exact calculation, which a spreadsheet can do with its yield or rate function, gives close to 13%.

Why bond prices move opposite to yields

Imagine you hold a bond paying 10% a year with one year left, and new bonds of similar quality now pay 12%. Nobody will pay full price for your 10% bond when they can buy a 12% one. For your bond to be attractive, its price has to fall until a buyer also earns about 12%.

In numbers, as a hypothetical example: your bond will pay 1,100,000 UZS in one year (the last coupon plus face value). A buyer who wants 12% will pay about 1,100,000 ÷ 1.12, roughly 982,000 UZS. If market rates instead fell to 8%, the same bond would be worth about 1,100,000 ÷ 1.08, roughly 1,018,500 UZS, which is above face value.

This is the core rule: when yields rise, prices of existing bonds fall, and when yields fall, prices rise. Bonds with a longer time to maturity react more strongly, because the fixed coupon is locked in for longer.

What moves market yields? Largely the general level of interest rates, which in Uzbekistan is shaped by the policy rate of the Central Bank of Uzbekistan (CBU), published on cbu.uz, and by inflation expectations. Our guide to interest rates and the CBU refinancing rate explains that link in more detail.

The risks behind the yield

A higher yield is usually payment for taking more risk. Before you compare yields, think about:

• Credit risk. The issuer may fail to pay coupons or repay the face value. A company in a weak financial position has to offer a higher yield to borrow. Read its reports on openinfo.uz.
• Interest rate risk. If rates rise after you buy, the price of your bond falls. This only turns into a loss if you sell before maturity, but you may need to.
• Liquidity risk. Many bonds on UZSE trade rarely. You may not find a buyer quickly, or only at a lower price.
• Inflation risk. A fixed coupon buys less when prices rise. What matters is your return after inflation, as explained in inflation and your savings.
• Reinvestment risk. When coupons arrive, you may have to reinvest them at a lower rate than before.

Reading a UZSE bond page

The exchange publishes the list of listed bonds and their terms on uzse.uz. On Finmind, each listed bond has a public page under UZSE bonds that you can open without a Finmind account. Its bond terms section shows the issuer, ticker and ISIN, the coupon rate, the coupon frequency, the face value, the issue and maturity dates, how many bonds were issued and how many were placed. If the coupon is set by a formula rather than a fixed percentage, the page quotes it as the exchange lists it and says so. When the exchange has recorded a trade, the page also shows the last close and a chart of daily closes; otherwise it tells you that no trade is recorded yet.

With those terms and a price, you can work out the current yield yourself and estimate the yield to maturity with the shortcut above. Compare the result with other bonds of similar maturity, and with what a bank deposit pays, keeping the different risks in mind. For shares, the stocks pages show the price and fundamentals in the same way, and stocks vs bonds explains how the two differ.

To practise without risking money, you can register for free and use the simulator and tutorials.

This article is for education only and is not investment advice. Investing in securities involves risk, including the loss of money you invest.