Clarification on certain finance terms surrounding bonds

Question

Whilst revising for my upcoming financial mathematics exam I've been struggling to get to grips with certain terms/ phrases used when studying Bonds. I am very new to Finance and get confused very easily. I've tried researching these online but I can never draw conclusions based on the technical language that a lot of websites use.

When I first learnt about bonds I came to understand that there were two main rates used to describe the basic nature of a bond: Coupon rate and Yield (rate). The coupon rate being the percentage of the Face Value which would make up each interest payment (coupon). The yield rate would be the interest rate at the time of the bond that one would use to calculate the present value of the coupons and the redemption value. I also understand that the coupon rate is always quoted as a nominal rate, convertible with the same frequency as the coupon payments, whilst the yield rate is effective.

Later on in my learning process the terms 'Interest yield' and 'Redemption yield' came into play. Is 'redemption yield' just another term for 'Yield to Maturity', and if so could you clarify what redemption yield actually is relative to the other rates mentioned? Is 'Interest yield' just the same thing as 'Yield rate'? Finally, what is the 'rate of return' or the 'return' on a bond? I see these terms seemingly used so loosely by my lecturer and I have seriously struggled to get to grips with all this terminology. I would be extremely grateful if anyone could offer some clarity to me on these terms. Sorry if this is seemingly a stupid post but I've nearly been pulling out hair at such a seemingly straight forward concept! Thank you.

Answer 1

Is 'redemption yield' just another term for 'Yield to Maturity'

Yes. It is the yield you will earn if you hold the bond until it matures (any change in market price after you buy it is irrelevant).

Is 'Interest yield' just the same thing as 'Yield rate'?

Yes (I have also heard this called "coupon yield"). Interest yield is the amount if interest you get relative to the purchase price. So if you buy a 5% coupon bond for 95% of its face value, the interest yield will be $5\% / 95\% = 5.26\%$.

Finally, what is the 'rate of return' or the 'return' on a bond?

The "total return" is composed of the income you get from coupons (coupon yield) plus the change in market value (capital gains yield). So if you bought the above \$1,000 bond for \$950, have received \$50 in coupons, and the bond is now worth (meaning you can sell it for) \$980, then your total gain is \$80, for a return of $\$80/\$950 = 8.42\%$. Note that the "interest yield" is 5.26% (as above) and the gain from market price alone is 30/950 = 4.16%, for a total of 8.42%. Depending on the time period you're looking at, you may need to annualize the return (I was looking at one year so the returns are already annualized)