Bond Yield Calculations

Bond Information Face value – original price of the bond Contract rate – APR Term – length of loan Yield – actual earnings on the bond For example, $5000 10-year 3% bond What is the yield?

Earning $ from Bonds Interest Income – fixed $10,000 6% $ 15,000 2% Contract rate * face value What does our $5000 3% bond pay in interest? $10,000 6% $ 15,000 2% $ 12,000 4% Also earn by selling a bond on the open market at a higher price than you paid for it (no matter where you bought it)

Bond Pricing Bonds prices are expressed as a percent of the face value 100 = par or face value If >100 – premium If < 100 – discount What influences bond prices?

Impact of interest rates on prices If interest rates are 5% would the following bonds be priced at a premium, discount or par? A $5,000 10 year bond with 3% APR 7% APR 5% APR 2% APR

What’s the price of our $5000 bond at …… 100 95 103 105 99 107

Calculating Yield Yield = Annual Interest/Current Price Annual Interest is fixed, Current price changes At par (face value) price = 100 and APR=APY For example, our $5000 10 year 3% bond price =100 APY = 150/5000 = 3%

What happens when the price differs from par? $5,000 3% 10 year bond Price Quote Price Yield $5000 3% 95 102 98 What is the relationship between price & yield?