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Two useful yield calculations for corporate bonds

by , 29 May 2014

The major reason for investors buying bonds is for the reliable income they provide. To make sure you're buying a bond with a good income, you need to be able to easily compare its performance with other income paying assets. To do this you need to calculate the yield. The yield is the income you get from a bond. So how can you calculate a bond's income yield? And are there any other useful yield calculations you should do? Let's take a closer look…

How to calculate a bond’s income yield

By calculating a bond’s yield you can easily use to it to compare it to other financial instruments that pay an income. This includes a savings account, other bonds and any dividend income you receive on shares you own.

Let’s walk through an example of how to calculate the simple income yield of a bond…

Let’s say there’s a bond with an interest rate of 6%. This bond’s par value (value of the bond when the company first released it) is R1,000.

The price of the bond is currently R900, Phil Oakley in Money Week explains. To calculate the income yield you divide the annual coupon (interest) of R60 by the current price of R900. This gives you a yield of 6.67%.

How to calculate a bond’s redemption yield

This is also the yield to maturity. This is the yield on the bond from the day you buy it until the day it matures. So in our example, this is the day you get back the initial borrowed sum of R1,000.

Let’s say the bond’s term is 10 years with a 6% coupon. This coupon means that twice a year the bond pays out R30 over the ten year period.

The bond is at R900 and has paid its first coupon of R30. If you buy the bond at this stage, you’ll receive all the other coupons on the bond plus the initial R1,000.

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You can use the IRR function on a spreadsheet to calculate the redemption yield. Or use one of the calculators on a corporate bond website so you don’t have to calculate it yourself.

In this example, the redemption yield is 7.44%. This is mostly the income yield, which is 6.67%. And the small capital gain you’ll make as you bought the bond for R900 and the company will pay you R1,000 at the end of the bond’s life.

So there you have it, two useful yield calculations for corporate bonds.

Two useful yield calculations for corporate bonds
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