1. Bond Yield Calculations

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

3. 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)

4. 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?

5. 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, year bond with
3% APR
7% APR
5% APR
2% APR

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

7. 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 $ year 3% bond price =100 APY = 150/5000 = 3%

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