How To Calculate How Much Money You Will Make On A Bond

How To Calculate How Much Money You Will Make On A Bond



How to​ Calculate How Much Money you​ Will Make on​ a​ Bond
If youre going to​ play the​ market,​ youre likely in​ it​ to​ win .​
You expect a​ modest return on​ your investment,​ or​ at​ least to​ make your money back .​
Your choice of​ investment matters a​ lot,​ so it​ really helps if​ you​ can calculate how much money you​ can expect to​ make .​
The most general meaning of​ yield is​ the​ amount of​ money returned (usually annually) in​ the​ form of​ dividends.
Within finance,​ a​ bond is​ a​ debt security,​ in​ which the​ issuer owes the​ holders a​ debt and is​ obliged to​ repay the​ principal and interest (the coupon) .​
Other stipulations may also be attached to​ the​ bond issue,​ such as​ the​ obligation for the​ issuer to​ provide certain information to​ the​ bond holder,​ or​ limitations on​ the​ behavior of​ the​ issuer .​
Bonds are generally issued for a​ fixed term (the maturity) longer than one year.
A bond is​ just a​ loan,​ but in​ the​ form of​ a​ security,​ although terminology used is​ rather different .​
The issuer is​ equivalent to​ the​ borrower,​ the​ bond holder to​ the​ lender,​ and the​ coupon to​ the​ interest .​
Bonds enable the​ issuer to​ finance long-term investments with external funds.
1 .​
Current Yeild
If you​ are looking to​ estimate the​ amount of​ money you​ stand to​ gain,​ the​ procedure is​ really quite simple .​
Divide the​ annual interest amount paid by the​ current market price .​
CY = IAP*100 .​
(The 100 turns the​ fraction into a​ percentage.) For example,​ a​ $1000 face-value (par) bond with a​ coupon (interest rate) of​ 7% that matures in​ 10 years may sell currently at​ a​ discount for $950.
2 .​
Holding Your Bond to​ Maturity
You will gain the​ most money in​ dividends if​ you​ hold your bond to​ maturity .​
Would you​ rather have $1000 today or​ $1000 a​ year from now,​ even assuming youre assured of​ getting paid in​ a​ year? Having $1000 sooner rather than later means earning interest on​ that $1000 for an​ additional year!
3 .​
Years to​ Maturity
YTM is​ the​ best number to​ use when comparing bonds with different rates and maturity dates .​
With a​ little practice,​ the​ process becomes familiar and loses the​ aura of​ numerology .​
Profits go to​ the​ fearless .​
Here's the​ formula...
c(1 + YTM)-1 + c(1 + YTM)-2 + .​
.​
.​
+ c(1 + YTM)-YUM + B(1 + YTM)-YUM = P
c = annual coupon payment (in dollars,​ not a​ percentage)
YUM = number of​ years until maturity
B = par value (original issue price)
P = purchase price




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