Bond Yield.

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Presentation transcript:

Bond Yield

Bond Yield What would give a better return on your investment? An 11% bond bought at 98 or A 12% bond bought at 102? The answer will depend upon the amount of interest you get with the bond, the market price, and how long before the bond matures. You need to assume that each bond is a $100 bond no matter what the face value is

Formula Bond Yield = Annual Income Current Market Price Annual Income = Annual Interest + Capital Gain Per Year Annual Income = Annual Interest - Capital Loss Per Year

Example One Find the approximate yield on a 14% $100 bond due in 10 years if bought at 98? Answer: Annual Income =($100 x 0.14) + (100-98)/10 =$14 + 2/10 =$14 + 0.20 = $14.20 Yield = $14.20/98 = 0.1449 = 14.49%

Example Two Find the approximate yield on a 11% $100 bond due in 10 years if bought at 102? Answer: Ann. Inc. = Ann. Interest – Cap Loss Per Yr Annual Income = ($100 x 0.11) - (102-100)/10 = $11 - 0.20 = $10.80 Yield = $10.80/102 = 0.10588 = 10.59%

Example Three Find the approximate yield on a 9% $100 bond due in 20 a if bought at 76? Answer: Ann. Inc. = ($100 x 0.09) + (100-76)/20 = $9 + 24/20 = $9 + $1.20 = $10.20 Yield = $10.20/76 = 0.1342 = 13.42%