Bond Yield, Interest Rates and Bond Prices - Coursework Example

Upon issuing a bond, the bond issuer will receive a return on the bond. The return which the investor receives from a bond is called yield and this is mostly received upon holding a bond to maturity. Therefore if an investor wishes to know how much a bondholder will receive upon the maturity of the bond, it is important to know how to calculate or measure the yield. There are various ways of measuring the yield and this paper will discuss various ways on how the yield is being measured or calculated (Becker & Ivashina, 2015).

• 2.0Current Yield

Since the securities ordinarily exchange the optional business sector, here and there they may offer less or increase the standard worth and they yield loan costs which are very unmistakable from the ostensible one and this is called current yield (Becker and Ivashina, 2015). Current yield is ascertained as:-

• 3.0Yield to maturity

The current yield does not factor in the time value of money (Antonakakis & Vergos, 2013). The present value of the coupon payments the investor will receive in

Exact formula:

• • • • Solve for r by trial and error.
• 4.0Yield to call

mandatory redemption fund that the bond issuer establishes to retire the debt periodically at the sinking fund dates which are clearly stated in the redemption schedule for the bond contract for a given price which in most cases are just but at par value (Greenwood & Vayanos, 2014). Both the call yield and yield sinker may not be pertinent in circumstances when interest rates have increased since the first time bond as issued due to the fact that bonds will be selling for less than the par value in the secondary market and help in support bonds prices for the holder of the bond (Greenwood & Vayanos, 2014).

same way the bond matured (Antonakakis & Vergos, 2013).

• 7.0Yield to Worst

This simply measured when the bond’s yield if the bond is retired at the earliest time possible that is allowed by the bond’s indenture (Antonakakis & Vergos, 2013).

• 8.0Interest rates and bond prices

It should be noted that bonds are normally sensitive to changes in the interest rates in the market. Any investor who is interested in investing in bonds in the secondary market must keenly watch interest rates this is due to the fact that interest rates determine the prices of the bond (Antonakakis & Vergos, 2013). An investor should be able to understand the bond market carefully and how they affect bonds prices. Interest rates form the basis of bond investment in the secondary market and the relationship between bond price and the interest rates is of great concern to any investor.