How to calculate bond yield?

Bond is a security of debtcharacter, which entitles the holder to reimburse the borrower (issuer) for its value at par value or to return another collateral. Traditionally, along with such a financial instrument as shares, the bond serves as an object for investment. Owning such a security can bring a regular income. So, in order to calculate the bond yield, you need to determine exactly how you are going to use the bonds and which option you think is preferable.

Different ways of generating income

By and large, the profit from owning bondscan be built on the basis of accounting for several options. To begin with, it is worth calculating the so-called coupon income, consisting of periodic standing payments over a period of a number of years. The amount of such income usually depends on the degree of reliability of the issuing organization. Such payments can be paid together with the entire amount, relying after the redemption of bonds, and can be indexed or charged at a fixed rate.

In addition, it is worth considering the probabilitychanges in the value of the bond itself over time. This income is calculated simply - the purchase price minus the selling price. The most beneficial for the owner of bonds, who wants to go this way of enrichment, is to buy bonds at a discount, that is, at a price below the nominal value of the security.

The third way to generate income, availableowner, - reinvestment, that is, the acquisition of additional securities for income from available investments, received in the form of dividends, interest, as a result of redemption or sale of the bond. In the event that you acquire debt securities for a long period, this option has the right to life and can actually bring some profit.

Current and final yield

To assess the yield of bonds and to achieve the most accurate indicators, you should divide the current and final profitability.

The first is calculated based on the annual income forSecurities in relation to the costs of acquisition. Coupon bonds are traditionally sold at a price much higher than the nominal, so the current yield on them is lower than the coupon rate.

In order to calculate the current bond yield, use the following formula:

D1 = (C1 + K) * 100%,

where D1 is an indicator of current yield, C1 is the sum of all revenues for the period, K is the rate of bond acquisition.

But the final yield should be calculated taking into account the changes in the value of the debt security:

D2 = ((C2 + D) / (K * T)) * 100%,

where A2 is the final calculated yieldbonds, C2 is the sum of total income in the aggregate, D is the change in the bond price (discount), K is the rate of bond acquisition, and T is the number of years of ownership of the security.

Do not forget about taxes, as well as on the levelInflation, which affect the yield of your bonds. In addition, when deciding to invest in buying bonds, you need to clearly understand their real value in terms of investment, as well as the income that the owner can get when choosing each particular strategy.

Although bonds, both coupon and discount,are among the safest and most conservative instruments with not too big, but constant and stable income. In any case, a beginner investor in investing in a portfolio of investments will invest in bonds to reduce overall risk, diversify assets and hedge against failures using more risky instruments.