[illumin8]

To be clear, the yield is determined by the free market as the price they pay for the bond. If the bond was originally priced at $100, with a 1% coupon payment (the amount the government or bond issuer will pay you in interest), if the resale value goes down to $50 in the open market, then the yield has doubled to 2%, since a new owner of the bond only had to pay $50 to get the same $1 coupon payment while holding the bond.

[fr0sty]

Regardless of whether the bond has a coupon payment or not the face value of the bond is due at maturity. In your example the $1 coupon is still paid but in two years you also get $100 back on your $50 purchase (netting 20+%apy).

Of course if the government defaults on your bond you get maybe on $1 coupon and end with a net loss of $49.

[illumin8]

Ah yes, you're correct. So my yield is way off. Thanks for the correction.