Generally a bond is issued specifying a face value, a rate of interest and the date of maturity. If there are no financial markets and the bonds purchased only by retail investors, investors would not have any option but to hold the bond till the date of maturity and receive the face value on maturity. During the life of the bond the investor would have received interest at regular intervals. This realisation of interest on the face value, also purchased at face value amounts to 'Promised Yield to Maturity'.
Existence of vibrant and flourishing financial markets add colour to otherwise boring bond investing. Large financial institutions like banks, insurance companies and mutual funds need to constantly buy and sell various investments including bonds. This creates an unbalnced demand and supply resulting in prices above or below the face value.
For those who buy the bonds in the open market , the actual interest earned is different. Interest will be higher than normal if the bond is purchased at a price lower than face value and lower if the bond is purchased at a price more than the face value.
Besides the varying interest trade in bonds in the market also results in gain or loss on Capital Invested, depending on the price paid.
Thus the market price influences the actual interest earned or 'Yield' of the bond investment. A very interesting new dimension is also added, namely capital gain or loss, similar to shares,
