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Bond Yield Calculations

Bond Yield Calculations. Bond Information. Face value – original price of the bond Contract rate – APR Term – length of loan Yield – actual earnings on the bond For example, $5000 10-year 3% bond What is the yield?. Earning $ from Bonds. Interest Income – fixed Contract rate * face value

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Bond Yield Calculations

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  1. Bond Yield Calculations

  2. Bond Information • Face value – original price of the bond • Contract rate – APR • Term – length of loan • Yield – actual earnings on the bond For example, $5000 10-year 3% bond What is the yield?

  3. Earning $ from Bonds • Interest Income – fixed • Contract rate * face value • What does our $5000 3% bond pay in interest? • $10,000 6% • $ 15,000 2% • $ 12,000 4% • Also earn by selling a bond on the open market at a higher price than you paid for it (no matter where you bought it)

  4. Bond Pricing Bonds prices are expressed as a percent of the face value 100 = par or face value If >100 – premium If < 100 – discount What influences bond prices?

  5. Impact of interest rates on prices If interest rates are 5% would the following bonds be priced at a premium, discount or par? A $5,000 10 year bond with • 3% APR • 7% APR • 5% APR • 2% APR

  6. What’s the price of our $5000 bond at …… • 100 • 95 • 103 • 105 • 99 • 107

  7. Calculating Yield Yield = Annual Interest/Current Price Annual Interest is fixed, Current price changes At par (face value) price = 100 and APR=APY For example, our $5000 10 year 3% bond price =100 APY = 150/5000 = 3%

  8. What happens when the price differs from par? $5,000 3% 10 year bond Price Quote Price Yield • $5000 3% 95 102 98 What is the relationship between price & yield?

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