A bond is an equity security for which its issuer undertakes to pay a fixed amount of capital to the holder at a certain point in the future or to pay an income, the amount of which is predetermined in the form of a certain percentage of the face value of the bond (coupon yield). It is believed that a bond is, although a more reliable financial instrument than a stock, but less profitable. However, experts in this field believe otherwise - the bonds can also make significant profits.
Instructions
Step 1
A bond can be compared to a bank deposit. But unlike him, the bond has some advantages. First, the solvency of bonds of large companies, such as Gazprom or MTS, surpasses the solvency of many commercial banks. In addition, the bank, accepting money for a deposit, issues it in the form of loans. Therefore, the profitability of the deposit will depend on the quality of the loan portfolio, which cannot be assessed by an ordinary client. If you close the deposit early, you will lose the accumulated interest. You can sell bonds at any time and at the same time practically will not lose in profitability.
Step 2
You should understand that, on the one hand, a bond is an obligation to return the invested amount of money and some income on it, on the other hand, it is a security that can be freely traded on the market, i.e. bought and sold. The yield of a bond is determined by the discount - this is the difference between its current value and the face value, because the price at which the bond is sold is lower than the face value. The yield on a bond depends on its maturity, as well as on the general level of interest rates. When the level of interest rates rises, the expected yield rises, and, consequently, the discount increases and the price of the bond falls. Conversely, when the level of interest rates falls, the expected yield falls, the discount rises, and the price of the bond rises.
Step 3
To find the bond's yield to maturity, use the following formula:
Yield to Maturity = Discount / Present Value / Number of days to maturity of the bond x Number of days in a year x 100%.
For example, a bond worth 80% of par and maturity of 1 year will have a 20% discount, and the yield will be 20 / 80x100% = 25%.
Step 4
If you need to find the bond's return on ownership, use this formula:
Yield on Ownership = Coupon Yield / Purchase Cost / Number of Days of Ownership x Number of Days in a Year x 100%.
