Bond yield: definition and calculation formulas

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Many are familiar with the situation when a certain amount of funds is required and it is borrowed. Everyone has experienced this at least once in their life. It should be borne in mind that not only people, but also firms and organizations, as well as the state, may need money. Organizations face the challenge of requiring far more funds than the banking institution can offer.

In such cases, the best option is to attract investors. Investors are natural or legal persons who invest money in an organization, expecting from it no less amount of profit. For these purposes bonds are issued. A bond is a security that is presented in the form of a loan. Within a certain time, the organization undertakes to return the borrowed funds to the investor. All nuances are agreed between both parties. And only after informed consent is the so-called contract. Without signatures, the paper will have no effect.

Price of bondsit can be anything that a future investor can invest, or the company appoints it on its own.

There are two types of securities:

• bonds - debt funds, the investor becomes a creditor for the organization;
• shares - capital, by purchasing which the investor receives a package of documents of the company and is its co-owner.

The yield of bonds depends on the economic situation in the country and on the ability of the owner of the organization to manage the funds received.

Payout options

The interest that is paid to the investor is agreed in advance, as well as the payment schedule. Debt repayment is made once a year, once every 6 months or every 3 months.

There are several payment methods:

• Fixed percentage. The easiest and most common option.
• Stepped rates. Each time the cost increases.
• Floating rate. Bond yields are constantly changing, depending on the exchange rate.
• Indexing the nominal rate.
• Sale at a discount.
• Based on winnings. Bonds do not go to everyone, but only according to the results of draws.

Types of income

The yield of bonds is characterized by a number of factors that completely depend on the conditions offered by the business owner:

1. Generate income from coupons. Each coupon contains the interest rate that will be paid to the investor by the owner of the business.
2. Current income. All bonds have a fixed rate. Whereinchanges in bond prices are not taken into account, regardless of the retention period. Prior to purchase, prices vary. At the time when an investor purchases securities, the value becomes fixed. Current bond yields do not take into account changes between the price at which securities were purchased and the redemption value.
3. The amount of profit depending on the redemption. Represents a certain percentage of the rate, which is able to establish equality between the market value and regular payments.
4. Total yield of bonds. In this case, all possible sources of profit are taken into account. In many specialized economic publications, this rate is also called the premises rate. If you correctly determine the rate of premises, then you can understand whether it will be effective to purchase securities.

Government loans

Being an investor is possible not only for commercial organizations. The state also has the right to issue securities. The funds raised make it possible to implement large projects at the state level or replenish the budget. In simple terms, government bonds are the amount of funds that is borrowed from ordinary citizens. The state promises to return investments in full plus interest.

What are government loans?

First of all, it is a type of security. They are no different from other bond options, they also have a nominal actual cost, whichallows investors to make a profit. The amount of such income is determined at the level of the Ministry of Finance.

Unlike commercial organizations, government bonds are more reliable. There are risks in both options. As an example, you can use the situation of the times of the USSR, when there was a depreciation of funds.

Government bonds are guaranteed to make a profit. Such investments will also be repaid within a few years. The term can vary from 1 year to 30 years. It is not necessary to wait for profit. Securities can be sold to anyone.

Where to buy bonds?

There are two ways to invest your own funds:

• Contact a broker. Operations with buying and selling are carried out in the same way as with other securities.
• Open a personal investment account. In such cases, income depends on the amount of the deposit.

What are the ways to make a profit?

Those who want to get a good percentage of the invested funds will not be profitable to buy Russian bonds from the state. The interest rate is the same as from a regular deposit in a banking institution - up to 11% per year.

Despite this, there is an opportunity to make a profit. The percentage is fixed annually, you can make a profit every 6 months.

Russian bonds can be bought and sold freely, like other types of securities. Prices fluctuate over time and there is money to be made.

Federal loans

Federal loan bonds for individuals are a type of bonds issued in ruble terms exclusively by the Ministry of Finance. Securities are issued in the form of coupons, which provide for payment with interest. Such loans can be categorized as government bonds.

What are bonds?

Depending on making a profit, we can distinguish:

• Interest-bearing bonds - in the form of coupons. Interest is charged on the amount spent.
• Discount bonds - the cost of payments is close to the face value of the securities.

Types of bonds depending on who issues them:

• State – Ministry of Finance is responsible for issuing.
• Municipality - the administration of individual cities and regions is responsible for issuing.
• Corporations - issued by organizations, firms, joint-stock companies.

Federal bonds for individuals - bonds from the government with a high interest rate, which allows investors to make good returns.

What are the features?

Compared to ordinary exchange-traded bonds, there are some features:

• Sale is allowed only to adults who have citizenship of the Russian Federation.
• You can not buy and sell in the financial markets. Also transfer to third parties, pledge or pay.
• You can cash out only at the bank where the bonds were purchased.
• Don't invest in other banks.
• Bonds cannot be gifted, but can be inherited.

Quote

Bond quotes are a set price for the purchase of securities available for sale on stock exchanges. At the same time, everything complies with the established norms of the law.

All operations are carried out by a special commission. All information is compulsorily distributed in specialized printed publications.

The official level of bond quotation is set for a specific period. Such rates are used for off-exchange settlement. The size of the quote depends on the economic indicators of the currency, on the position of the organization in the market for goods and services.

Value of securities

The price of bonds represents the value of the cash flow that is expected at the moment. Such a flow includes two components: coupon payments and the value of bonds paid.

It is possible to determine the cost, a number of conditions are provided for this:

• Cash flow is presented in periods. This allows you to see the change in coupon yield when bonds are issued.
• The amount of income is set depending on the risks that may happen in the stock market.
• Payments on bonds are made in full after a certain period. This period is set when buying securities.

When sold, bonds have a value that differs from the face value. The price may be influenced by:

• interest rate;
• time the bond is incirculation;
• organization rating;
• maturity.

In the event that the owner of the bonds sells securities, all rights under the orders are transferred to the new owner. Including the ability to dispose of the funds that have accumulated while the bonds were with the previous owner.

International bonds

All international bonds can be divided into foreign bonds and Eurobonds.

Foreign sell all countries that borrow in local currency. For example, large corporations in France sell bonds in the UK. They are issued in pounds sterling. The main buyers are considered to be local investors. A bank syndicate acts as a guarantor.

Main differences:

• French corporations issue bonds;
• used currency when selling - pound sterling;
• The foreign bonds are guaranteed by a UK-based banking syndicate.

Eurobonds are distributed through a transnational banking syndicate. Securities can be issued simultaneously in several currencies. This allows you to minimize the risks associated with currency exchange operations. The income received is not taxed. This type of investment is relevant for those who pay high income taxes.

At the same time, there are a number of properties that can be classified as valuable:

• the right to choose the currency;
• high elasticity;
• there is international capital mobility;
• high profit opportunity;
• there is a close relationship with foreign securities.

Income at face value

Return on investment is calculated as the difference between the nominal yield of a bond and the rate of inflation. Before taking into account all possible risks, it is worth choosing a period of time and deciding whether we will talk about real or nominal income.

Income at face value is predetermined. The investor only has to wait for the maturity of the bonds. If you do not take into account inflation, then such investments have no risks.

When forming a portfolio, regardless of its type, it is necessary to analyze possible income and risks for all financial indicators. On the territory of the Russian Federation, nominal incomes are completely official. They are used to calculate returns on the government securities market. They are also common in bill markets.

Profit calculation

The market yield of bonds is the profit that an investor receives from investing in securities. Calculating income is very easy. To do this, you need to divide the number of purchased coupons by the cost. In the event that the bonds were bought at face value, the income level is equal to the coupon rate. Income may vary due to currency fluctuations.

Specialists formulate the ratio of bonds to income received as follows: at the time of rising prices for valuablepaper income level falls and vice versa.

Formulas for calculating income

For each type of income, you can apply the appropriate formula for calculating the yield of bonds.

1. Coupon income. Suppose, when buying a bond, it was indicated that the yield would be 11.75 percent per year. The cost of the bond is 1 thousand rubles. You can purchase two of these coupons per year. This means that every 6 months you can receive 58 rubles 75 kopecks. The cost for the year is 117 rubles 50 kopecks.
2. Current income. In this case, the formula i (m)=(Nk)/P=g/P (k)100.

Consider the notation:

• k – coupon rate per year;
• N – face value;
• P – acquisition cost;
• P (k) – set rate from the moment of purchase of bonds.

Assume that the income is 11.75 percent per year, and the exchange rate at the time of purchase is 95 rubles, then the current income will be 12 rubles 37 kopecks.

Thus, when calculating the income of a portfolio of securities, a formula is used that is completely similar to the formula that is used for the classical calculation.

Coupon rate

Coupon rate on bonds is interest income annually. For example, if the interest rate is 12 annually, and the value of the security is 1,000 rubles, then for a calendar year it is possible to receive 120 rubles.

There are several coupon options:

• Permanently fixed. Percentknown to the investor prior to the purchase. It does not change from the moment the coupon is purchased until the day all payments are made.
• Variably fixed. The amount of income is known to the investor only partially. The rate is known only up to a certain period. After this period, a new rate is determined, which can either decrease or increase.
• Floating. The interest rate is constantly changing. It depends on binding to some indicator. The size of the rate can be influenced by: the exchange rate, inflation, rates set by the Central Bank.

Any person who holds securities must pay a tax of 13 percent annually.

OFZ income

There are two types of federal loan yields: fixed and variable. Fixed rates are also called fixed rates. They are set for each coupon for a certain period. The rate depends on the time of issue of coupons. Variable rates are completely dependent on the official data received, which depend on inflation. Also, the percentage of the rate depends on the Central Bank of the Russian Federation.

Income is formed from two indicators:

• the amount of income that the investor will receive from the purchased coupon;
• profit from buying a coupon that has a value below par.

In cases where an investor purchases a coupon that has a value above par, there is the possibility of significant losses.

Federal loans accumulatecoupon profit. By the time the payment is due, the value of the coupon increases. When a resale occurs, the owner takes these points into account.

Be sure to take into account the tax system, since every type of income is subject to mandatory taxation. If one person owns the coupon all the time, then the tax will be 15 percent of the profit. When selling a coupon, you need to pay about 35 percent for the difference in value.

To get a good profit, these points must be taken into account. All activities in this area are regulated at the legislative level.

Current income

Current bond yield is the amount of coupon payments annually. Such indicators do not take into account the investor's income, which depends on the price variation at the time of redemption of the bonds or during the sale.

To evaluate the effectiveness of the result, you can use a calculation that includes the amount of the premium to the value of the purchased coupon.

To reduce the possible risks when investing in securities, it is best to choose organizations that provide a short period until the loan is fully repaid. Fluctuations in value can only be observed during the period when the economic crisis occurs in the country.

Despite this, the exchange rate returns very quickly depending on the improvement of the economic situation or when the maturity date of the investment deposit approaches.

It is also possible to minimize risks ifapply to large companies and organizations that have proven themselves to be the best among investors. But at the same time, it must be taken into account that the income will be significantly lower than that of small enterprises.

Definition of profitability

Determine the yield of bonds using the following formula: r=C/P.

Consider the designation of indicators:

• r – current income;
• С – purchased coupon;
• P is the current coupon price.

Let's say the coupon was purchased at a price of 20 thousand rubles, at the moment the cost of this coupon has increased to 80 thousand rubles. Therefore, the income is determined as 25 percent.

Before you buy bonds, you need to understand in detail the types of securities available. It will be useful to consider the options for generating income. All this will allow you to evaluate your capabilities and understand how much profit you can get when investing. In such cases, it is better not to rush and check everything carefully.