Every one of us has to borrow money from time to time. Many organizations (such as governments, corporations), like ordinary people, also often require outside money. But it is much more difficult for legal entities to borrow large sums of money. Instead of simply promising to return the money they borrowed, organizations have to borrow money, promising to return it with reward. Bonds are one such type of borrowing.
Instructions
Step 1
In its most general form, a bond is a promissory note sold by the issuer to the public at fixed amounts. At the same time, the borrowed money is changed to a sheet of paper, which indicates how much the person borrowed, at what percentage, for how long.
Step 2
This form of commitment is widely used by governments to finance their operations or by cash-strapped companies seeking to expand production and market share.
Step 3
To compare bonds with other investment instruments, the yield category for this security is applied. You can calculate the yield on a bond by dividing the amount of interest payments for the year by the current price of the security.
Step 4
So, if a bond worth $ 2000 brings you $ 150 in interest income per year, then its current yield will be $ 150 divided by $ 2000 and multiplied by 100, that is, 7.5%. Current yield: $ 150 / $ 2000 = 0.075 (7, five%)
Step 5
Keep in mind that when assessing the yield of a bond, you cannot simply take the coupon rate as a basis. Bond prices can change in accordance with interest rate fluctuations, so that the bond can be sold at a price different from the face value of the security. If you hold the bond until maturity, you are guaranteed to receive its principal value. But if you want to part with the bond ahead of maturity, you will have to sell it at the current price, which can be either higher or lower than par.
