Bonds are debt securities. The bond certifies the loan relationship between the owner of the security, who is the lender, and the organization that issued the bond (the borrower). As an investment object, a bond can bring a certain income to its owner. There are special calculation methods to determine the yield of a bond.
Instructions
Step 1
Estimate the coupon yield on the bond. It consists of periodic payments in the form of standing payments over a certain number of years. The amount of coupon income is determined by the financial reliability of the organization that issued the security. The higher the reliability of the issuing organization, the lower the percentage. Coupon payments can be at a fixed rate, can be indexed, or paid along with the principal when the bond is redeemed.
Step 2
Estimate the possibility of earning income from changes in the value of the bond. Such bond yield is the difference between the purchase price and the sale price for a given period. This type of income makes sense if you purchase a bond at a discount (at a price below par).
Step 3
Consider earning income from reinvesting the interest earned from the bond. This type of income is important if you are looking to purchase long-term bonds.
Step 4
For an accurate estimate of the yield on a bond, use a relative measure of income per unit cost. Distinguish between current and final bond yields.
Step 5
Calculate the current yield on a bond, which reflects the current annual return on a security relative to the cost of acquiring it. The calculation is carried out according to the following formula: D1 = (C1 + K) * 100%; where D1 is the current profitability;
C1 - the amount of income;
K - bond purchase rate.
Step 6
Calculate the final yield, which takes into account the change in the value of the bond. D2 = ((C2 + D) / (K * T)) * 100%; where
D2 - total bond yield;
C2 - the amount of total income,
D - discount, i.e. change in the value of the bond;
К - bond purchase rate, T is the period of holding the bond (number of years).
Step 7
When evaluating the yield on a bond, also consider taxes and inflation.
