Bond Yield Calculator

Wallstreetmojo today we are going to discuss a tutor on current yield now what is exactly current yield see current yield is an investment of annual income that is interest or dividend divided by the current price of the security and this measures looks at the current price of the bond instead of the face value so the current yield represents the return on the investors would expect if the owner purchased the bond and held it for a year but current yield is not actual return foreign investors who receives if he holds bond until maturity so current yield is all the annual cash flows divided by the market price per share breaking down the current yield current yield is the most often applied to bond investments which are security that I issued to an investor's at par value I mean or the face value of let's say a $1000 bond carries a coupon amount of interest that has stated on the face value face of the bond certificate and bonds are traded between investors since the market price of the bond changes and investors may purchase a bond at a discount which is less than the power value or a premium and the purchase price of the bond of XT current yield now let's understand how to how the current yield is is this calculated if an investor let's say he buys a 6% coupon rate bond for a discount of let's say of $900 the investor earns how much 1000 x 6 because 1000 is the face value into 6% is a coupon rate so what is a coupon $60 so what is the current yield 60 divided by the market price what was your market price nine hundred so 60 divided by 900 900 which gives us 6.

current yield now let&#39;s understand how

to how the current yield is is this

7% so over here the $60 in annual interest is fixed regardless of the price paid for the bond if on the other hand an investor purchases a bond at a premium of 1100 the current price will become 60 divided by 1100 which will give us 5.45% so the investor investor is paid more for the premium bond that pays the same dollar of the interest so the current yield is lower the current yield can also be calculated for stocks by taking dividend received for a stock and divided by the amount by the stocks current market price now what is YTM yield to maturity it is the total return on on a bond assuming that the bond owner holds the bond until the maturity date assume for an example that you know 6% coupon rate of bond purchase for $900 which matures in 10 years now to calculate the YTM and investor needs to make an assumptions about the discount rate so that the future principal and interest payments are discounted at the present value in a previous example itself if the investor received 60 in the annual interest payment for 10 years at maturity in 10 years the owner receives the par value of $1,000 and the investor recognizes 100 as the capital gain so the present value of the interest payments and the capital gain are added to compute the bonds YTM now if the bond is purchased at premium the YTM calculation includes the capital loss and when the bond matures at the par value now the current yield formula is a different sort of a formula because it does not calculate the return on the original price rather it calculates the return on the current price so now let's have a look at the current yield formula in in the let's have a look at the formula see the current yield is equal to the

annual coupon see over here you can

instead of annual coupon you can also

annual coupon see over here you can instead of annual coupon you can also use the discount okay so will write annual coupon divided by the current bond price okay so this is our formula now let's take a current yield formula a example a practical example let's say there's a company whose name is Betty okay the Betty has invested in two bonds the original price of the two bonds were the price of 2 bonds let's say bond A and bond B so the original price I'm just writing price over here was 1000 and 1500 the risk for both the bonds is similar okay the annual coupon for each of these bonds are the annual coupon just writing annual Cooper will be which will be based on a percentage so let's say the annual coupon is 150 dollars over here and 180 dollars respectively the current prices of this bond are 1200 this was the original price let me just write original price this is your current price so the current price is 1200 and 1800 okay find out the Bond yield and current yield for each of this bond and on the basis of the yield which bond Betty should choose to invest so let's find out the bond yield first the bond yield for the first bond let's write over here

bond yield so the for the first bond

that is A will be how much the annual

bond yield so the for the first bond that is A will be how much the annual coupon divided by the current market original price actually that is 1000 and you can do just control R because it will follow the same formula so will get 15% and 12% okay so now will calculate the current this was the bond yield basically now will calculate the current yield of the bond so we have been given the I mean the current prices and the same annual coupons will be applied so this was the bond yield now let's calculate the current yield the current yield is going to be the coupon divided by the current price and do control R there we have our answer 13% and 10% that is close enough to 12.5 and 10% so on the basis of the yield but he should choose to basically invest in the first bond that is the current yield having 12.5% bond yield of 15% since both of these bonds are similar in terms of risk we can easily say that the first bond will be best among the two okay let's get into the nitty-gritty of the exploration part of the current yieldof formula no matter at what the original price of the bond here is the current yield formula will only calculate the return on the current price not on the original price okay be very sure about that that's why it's not called bond yield so in the case of the bond yield we calculate the return on the original price look at that we have calculated on key 8 that is our original price got it so however in the case we will only consider the current price while calculating the return for example let's say that the investors have bought a bond let's say at a price of 120 dollars and the bond promises a return a 10% return okay now the annual coupon this is the return we bought at okay and let's say the coupon the coupon is let's say 12 dollars so how the current price will be close enough to let's say let's say take it 100so the bond yield over here is going to be 10 right it's going to be 10 the bond price is going to be 12 / 120 that's going to be 10% this is going to be our bond yield but the yield would be actually 12% the current yield is going to be 12% that is is equal to 12 divided by 100 you can see the difference okay so what is the use of the yield for an investor high risk should result in higher returns that's why whenever we look at multiple investments we need to multiple ratios to judge worthiness of each investments in regards to bond investments investors look at quite a few ratios like bond yield yield to maturity yield call and so on and so forth the current yield of a bond is specifically used to see how to risk investments turn out in the same measuring grid so investors also will always look for the premium for taking higher risk if it so happens that the investors have the option to choose one from the two one from the to high risk bonds investments then the investor will only choose the one that pays more return and that's why it is being used and in and in such in such an important indicator okay now let's look at the current yield calculator so you can quickly get into the

nitty-gritty and quickly check upon

various situations and get to the answer

nitty-gritty and quickly check upon various situations and get to the answer this is our current yield calculator let's say if we put 100 as the coupon and the bond price as 1,000 so your current yield is how much 10% remember that is always an inverse relationship between the interest rate and the price so I'll just quickly get you there the concept of interest rate that is the interest rate and the price of the bond so remember this one thing that there will be always be a inverse relationship between the interest rate in the price so if the interest rate goes up the price will go down okay let's say in interest rate is 10 percent and the price is 1,000 so if the interest rate goes to 9 percent the price will shoot up let's say for an example 1100 if it goes to 11 percent then this will shoot up to 900 just an example this is how the inverse relationship will go because it's as simple that if an investor's have ever bought a bond let's say for a 10% interest rate and at a price of 1000 now if the interest rate turns out to be 9 percent okay if the interest rate turns out to be 9 percent for an outside investor it will be like why would I take a bond at 9% so for 4 less it for the lesser person date you have you will have to pay a

more price so always remember there will

be an inverse relationship between the

more price so always remember there will be an inverse relationship between the interest rate and price I hope you have got a really good concept in your in your brain regarding the bond yield and the current yield thank you everyone

## Post a Comment