Yield and Interest Rates

When investing in bonds, you will often hear the term ‘yield.’ But what does yield mean?

A bond’s yield is influenced by the current market climate, meaning how much investors can demand for lending money to an issuer for a specified period of time. The yield of a bond is also based on the price paid for the bond, its coupon and the bond’s term-to-maturity.

When it comes to the price of a bond, this can be impacted by a number of factors, including:

  • the creditworthiness of the issuer
  • the overall economic outlook and inflation rate and
  • changes to interest rates in the market.

A bond’s yield and price have an inverse relationship, meaning they move in opposite directions.

So, when yields rise, bond prices fall. And when yields fall, bond prices rise.

Let’s look at an example: Say an investor buys a bond for one thousand dollars that has an interest payment, or yield, of six percent, which earns them sixty dollars in interest each year.

If yields increase by one percent, new bonds will now offer an interest payment of seven percent on one thousand dollars.

Because investors are now able to buy a bond with a higher interest payment – or yield – not as many people will want to buy the six per cent bond. The six percent bond’s price will fall, causing its yield to rise to seven percent and remain in line with the market.

Another term often used in discussions about bonds is duration.

Duration is a measurement of how sensitive bonds are to changes in interest rates, and is expressed as a number of years.

For example, generally, if a bond has a four-year duration its price would either rise or fall by four percent for every one percent change in yield.

Typically, the further away a bond is from its maturity date, the longer its duration, and the greater the price change could be when interest rates move. For investors, a good rule of thumb is to invest in bond funds with an overall duration that is equal to their investment time horizon.

But remember, even though bond prices fall when yields rise, your current coupon or interest payments can be reinvested at this new higher rate. Over time, that higher reinvestment rate will help offset the fall in the bond’s price.

To learn more about fixed income investing, talk to your financial advisor or visit rbcgam.com.


This report has been provided by RBC Global Asset Management (RBC GAM) for informational purposes only and may not be reproduced, distributed or published without the written consent of RBC Global Asset Management Inc. (RBC GAM Inc.). In Canada, this report is provided by RBC GAM Inc. (including Philips, Hager & North Investment Management). In the United States, this report is provided by RBC Global Asset Management (U.S.) Inc., a federally registered investment adviser. In Europe and the Middle East, this report is provided by RBC Global Asset Management (UK) Limited, which is authorised and regulated by the UK Financial Conduct Authority. In Asia, this document is provided by RBC Investment Management (Asia) Limited, which is registered with the Securities and Futures Commission (SFC) in Hong Kong.

RBC GAM is the asset management division of Royal Bank of Canada (RBC) which includes RBC GAM Inc., RBC Global Asset Management (U.S.) Inc., RBC Global Asset Management (UK) Limited, RBC Alternative Asset Management Inc., the asset management division of RBC Investment Management (Asia) Limited, and BlueBay Asset Management LLP, which are separate, but affiliated subsidiaries of RBC.

This report has not been reviewed by, and is not registered with any securities or other regulatory authority, and may, where appropriate, be distributed by the above-listed entities in their respective jurisdictions. Additional information about RBC GAM may be found at www.rbcgam.com.

This report is not intended to provide legal, accounting, tax, investment, financial or other advice and such information should not be relied upon for providing such advice. The investment process as described in this report may change over time. The characteristics set forth in this report are intended as a general illustration of some of the criteria considered in selecting securities for client portfolios. Not all investments in a client portfolio will meet such criteria. RBC GAM takes reasonable steps to provide up-to-date, accurate and reliable information, and believes the information to be so when printed. RBC GAM reserves the right at any time and without notice to change, amend or cease publication of the information.

Any investment and economic outlook information contained in this report has been compiled by RBC GAM from various sources. Information obtained from third parties is believed to be reliable, but no representation or warranty, express or implied, is made by RBC GAM, its affiliates or any other person as to its accuracy, completeness or correctness. RBC GAM and its affiliates assume no responsibility for any errors or omissions.

All opinions and estimates contained in this report constitute RBC GAM's judgment as of the indicated date of the information, are subject to change without notice and are provided in good faith but without legal responsibility. Interest rates and market conditions are subject to change.

Return estimates are for illustrative purposes only and are not a prediction of returns. Actual returns may be higher or lower than those shown and may vary substantially over shorter time periods. It is not possible to invest directly in an unmanaged index.

A note on forward-looking statements: This report may contain forward-looking statements about future performance, strategies or prospects, and possible future action. The words "may," "could," "should," "would," "suspect," "outlook," "believe," "plan," "anticipate," "estimate," "expect," "intend," "forecast," "objective" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance. Forward-looking statements involve inherent risks and uncertainties about general economic factors, so it is possible that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution you not to place undue reliance on these statements as a number of important factors could cause actual events or results to differ materially from those expressed or implied in any forward-looking statement made. These factors include, but are not limited to, general economic, political and market factors in Canada, the United States and internationally, interest and foreign exchange rates, global equity and capital markets, business competition, technological changes, changes in laws and regulations, judicial or regulatory judgments, legal proceedings and catastrophic events. The above list of important factors that may affect future results is not exhaustive. Before making any investment decisions, we encourage you to consider these and other factors carefully. All opinions contained in forward-looking statements are subject to change without notice and are provided in good faith but without legal responsibility.

® / ™ Trademark(s) of Royal Bank of Canada. Used under licence.
©/ RBC Global Asset Management Inc., 2017
Publication date: (August, 2017)