Bond Total Return: 3 Ways to Assess the...Calculation of Return on Bonds ( With Formula) PDF Calculating the Annual Return.

James Chen was the director of investing and trading at Investopedia.He is a global market strategist.

The realized yield is the return earned during the holding period.It could include dividends, interest payments, and other cash distributions.The term "realized yield" can be applied to bonds that have been sold before their maturity date.The realized yield on bonds includes the coupon payments received during the holding period, plus or minus the change in the value of the original investment, calculated on an annual basis.

Under most circumstances, the realized yield on investments with maturity dates is likely to be different from the stated yield to maturity.When a bond is purchased and sold at face value, the redemption price of the bond at maturity is an exception.A bond with a coupon of 5% that is purchased and sold at face value delivers a 5% realized yield for the holding period.The yield to maturity is 5% when the bond is redeemed at face value.In other circumstances, realized yields are calculated based on payments received and the change in the value of principal relative to the amount invested.

The yield to maturity is not necessarily what a bond market participant actually gets.A one-year bond with a 3% coupon and a principal of $100 selling at $102 is roughly equivalent to a one year bond that has a 1% coupon at face value.The bonds have a yield to maturity of 1%.If the market interest rate falls half a percentage point one month later, then one-year bond prices will rise by about 2.5%.If the investor sells the bonds after only one month without collecting coupon payments, the result is a realized yield of over 6 percent on an annual basis.

Realized yield is useful for evaluating high-yield bonds.Realized yield allows investors to deal with the fact that some high-yield bonds almost always default.

Because of defaults, the realized yield of a high-yield bond fund is likely to be lower.

An example will show how yield works in the high-yield bond market.For a particular year, interest rates and default risk would stay the same.The one-year Treasuries have a yield to maturity of.05%.A high-yield bond fund has a yield to maturity of 5%, but 3% of the bonds default during the year.The realized yield for the high-yield bond fund was 2% because of the defaults.The yield to maturity for the Treasuries was the same as the realized yield.

Realized yield is how much money the investor made."Realized yield" and "realized return" are used interchangeably in the bond market.The term "realized return" is often used in the stock market.The major exception is high dividend yield stocks.

Realized yield is the total return when an investor sells a bond.A bond maturing in three years with a 3% coupon has a yield to maturity of 3%.The loss of principal is 4% if the bond is sold exactly one year after purchase.The realized yield is negative 1% because of the coupon payment.If the bond is sold after a year at $1,020, there will be a 2% gain in principal.The yield increases to 5% because of the coupon payment.

If you cash out before the maturity date, you will have to pay a penalty.Six months of interest is the typical charge for early withdrawal on a two-year CD.An investor who cashes out a two-year CD that pays 1% after one year accrues $1,000 of interest.The penalty is six months.The investor will get $500 over a year for a realized yield of 0.5% after paying this fee.

Exchange traded funds and other investment vehicles without maturity dates are subject to the calculation for realized yield.An investor who holds an exchange traded fund paying 4% interest for two years and sells for 2% gain earns 4% per year in interest.The realized yield is 5% per year when the increase in principal is spread out over the two-year holding period.