Investments in bonds today are becoming more popular among ordinary people who are not savvy in economic issues. And in this article we want to talk about how to calculate the yield on bonds. But first a little general information on this type of securities.
What are bonds and what is their advantage over stocks?
Advantage in risks. Acquiring shares, we get the right to a part of the enterprise's income in the form of dividends (reward to holders) and an increase in the price of the shares themselves. But at the same time we take on ourselves financial risks, as the shares can, including in their market value.
Bonds have a validity period, after which they are guaranteed to be redeemed at the nominal price specified in the securities themselves. Plus, the holder receives pre-agreed interest. The risk of losing money in this case can only be if the enterprise goes bankrupt. Thus, bonds are considered a safer way of investing, but the income in the case of shares can be significantly higher.
How is the value of bonds formed and what is affected by it
There is such a thing as coupon yield. Calculate this income is easiest - it consists of the nominal value and the interest that is specified in the bonds. For example, 10 percent per year from a bond of 1000 rubles is equal to 100 rubles per year. It would seem that everything is simple, but such bonds on the market can be sold not at par.
In the case of the acquisition of bonds on the market, we will pay not only its price at current quotes, but also add to it the amount of remuneration for the coupon income already accumulated at the time of transfer of the security. Thus, the former holder of the bond compensates for his losses from the fact that by transferring the asset into the hands of others, he refuses to pay coupon yield, which can occur both annually and several times a year.
Method of calculating the bond yield
It should be noted that today on the Internet there are numerous calculators in which you can easily and easily calculate the profitability by entering several parameters. We'll show you how this is done manually so that you understand the principle more.
Calculation of current yield
Since a bond is often purchased not at par, it is necessary to calculate its current yield. It is calculated from dividing the coupon yield for the year (or other period) by the current market price, multiplied by 100 percent. However, in this case we do not get data on how the price of a bond changes during its storage, therefore, such an indicator does not take into account the difference in the exchange rate between the purchase and redemption prices. Therefore, to obtain more accurate data, the following calculation is used.
Calculation of total profitability
The most complete calculation, which allows you to calculate the amount of profit in relation to the current market price. This indicator is also called "fair value". Below we show its formula:
P - price of bond purchase at market value
C - the amount of coupon payments for the period during which you will own the bond
t - time of bond ownership (depending on the term of its validity)
H - bond redemption price
r - bond yield indicator
Let us give an example. Take the bonds of the conditional enterprise with the release date on January 22, 2013 and the end of the action on January 19, 2016. We redeemed them when there was, for example, 502 days left before maturity, and the current coupon is 7 out of 12, that is, there are 6 more. In this case, the face value of the bond is 1000 rubles, and its current price in the market is 98.5%. Also known as the ACY of the coupon is 9.82 rubles, and the annual rate is 8.15 percent. Finally, we know the monetary value of the coupon, which is 20.32 rubles.
Thus, our calculation will be as follows: r = ((1000- (985 + 9.82)) + 20.32 * 6) / (985 + 9.82) * (365/502) * 100%, which ultimately gives we have 9.28% per annum.
It should be taken into account that the real yield will be lower, since there is also a commission to the broker, as well as income tax, which is 13 percent for individuals.
Which bonds give the greatest return?
Bonds can be issued by both the state and corporations. In this case, in the case of federal loan bonds, the maximum yield is 10 percent. In the case of corporate, you can expect a return of 15 percent or more.
Naturally, these indicators entirely depend on the situation either in the country's economy, as well as interest rates, or on the state of the company, in the case of private bonds.