Skip to main content

Debt instrument and its Yield

How you can use this measure to take investment decisions?


   Yield and yield-to-maturity (YTM) are commonly used to arrive at investment decisions. They provide a common benchmark to evaluate different investment instruments.


   Yield is the percentage rate of return paid on a stock in the form of dividends, or the effective rate of interest paid on a bond or note. There are many kinds of yields depending on the investment.

Forms of yield    

YTM is the most popular measure of yield in the debt market. YTM is the percentage rate of returns paid on a bond, note or other fixed income securities if the investor buys and holds it till its maturity date.


   Current yield is the coupon rate divided by the market price and gives a fair approximation of the present yield. The yield on government securities is impacted by various factors. These include prevailing interest rates, inflation rate, level of money supply in the economy, future interest rate expectations, and borrowing program and monetary policy of the government.

Calculating YTM    

The calculation for YTM is based on these variables:

• Coupon rate

• Length of time to maturity

• Market price of bond


   YTM is basically the internal rate of return on a bond. It can be determined by equating the sum of the cash flows throughout the life of the bond to zero. One of the major assumptions underlying YTM is that the coupon interest paid over the life of the bond is assumed to be reinvested at the same rate.


   The YTM is obtained through a trial and error method by determining the value of the entire range of cash flows for the possible range of YTMs so as to find the one rate at which the cash flows sum up to zero.

Yields and bonds    

Yield and bond price are inversely related. So, a rise in price will decrease the yield and a fall in the bond price will increase the yield. In fact, both inflation as well as the interest rate tends to have an impact on the value of a bond. Usually, there is an immediate and predictable effect on prices of bonds with every change in the level of interest rates. When the prevailing interest rates in the market rise, the prices of outstanding bonds will fall, to equate the yield of older bonds in line with higher interest new issues.


   This happens as there would be very few takers for the lower coupon bonds, resulting in a fall in their prices. The prices would fall to an extent where the same yield is obtained on the older bonds as is available for the newer bonds.


   In case the prevailing interest rates in the market fall, there is an opposite effect. The prices of outstanding bonds will rise, until the yield of older bonds is low enough to match the lower interest rate on the new bond issues. These fluctuations in bond prices contingent with changes in the interest rates tend to ensure that the value of a bond will never be the same throughout its life. A bond's value is likely to be higher or lower than its original face value, depending on the market interest rate, the time to maturity and its coupon rate.

 

 

 

 

Popular posts from this blog

What are the factors affect the changes in Interest Rate of Fixed Deposits?

  What are the factors affect the changes in rate of Fixed Deposits? Fixed Deposits are now considered to be a very old fashioned method of saving, but still attract many investors since they have guaranteed returns at the end of the tenure of the investment at a decent interest rate. There are various factors that affect the rates of interest for a Fixed Deposit. Policies of the Reserve Bank of India   - The several norms and restrictions posed by the Reserve Bank of India , in order to gain optimum control over credit and inflow and outflow of fund throughout the country. The repo rate changes, cash reserve ration tends to change and these changes affect the banking products like Fixed Deposits, loans etc. Recession   - When unemployment in a country crosses the benchmark set Recession hits, and slowly the country faces an economic slow movement, affecting the purchasing power of the people in the country, forcing the Reserve Bank of India to release more funds in the financial marke...

Capital Protection Oriented Funds

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Capital Protection Oriented Funds   Erosion of capital is one of the key concerns for investors wanting to invest in equity mutual funds. To address this concern, asset management companies have launched Capital Protection Oriented Funds (CPOFs). What are CPOFs? CPOFs are generally three to five-year, closed-ended funds where 70-80% of the portfolio is invested in fixed income securities, which mature on or before the scheme's tenure. The investment in fixed income securities grows to 100% at the end of the tenure, providing the investor with capital protection. The remaining portion (20-30%) is used to take exposure to equity, which provides the upside. Exposure to equities is either by directly buying equity stocks (plain vanilla CPOFs) or by b...

Understanding Your Cibil Credit Information Report

   WE ARE all familiar with the anxiety and uncertainty that we feel when applying for a loan. After all, it's the lender who decides whether we can own our dream home, our first car, or whether our children can pursue higher education. In a nutshell, a better life depends on the lender's decisions.    While other factors do play a part in the lender's decision, the Cibil Credit Information Report ( CIR ) plays a crucial role in a lender's decision to approve a loan application.    Previously, lenders would treat all loan seekers equally. Each applicant, if approved by the lender's internal credit policy, would be charged at the same interest rate for a particular loan size and purpose. The lenders would charge a higher interest rate to all the borrowers, in order to compensate for the possible default of a small portion of the loan disbursed. In other words, it's like a professor (the lender) punishing an entire class (borrowers) for the mischief played b...

Good Loan

Why Is It A Good Loan?: Loans against gold are cheaper and better than personal loans as the former are available at lower interest rates. In contrast, the interest rates on personal loans are not standardised and can vary from bank to bank. Also, a personal loan depends on a host of factors including, the borrower's salary, profession and the purpose for which the loan is being taken.      For instance, the interest rate on a personal loan of 5 lakh falls in a wide range of 15-30%. But loans against gold are available for as low as 11%. Secured borrowing such as a loan against gold, investments or property is cheaper because it is backed by some assets, which command a good value at any point of time. If the borrower defaults on the loan, the banks can liquidate the assets to settle the loan account.    Being a secured loan, the risk of default and credit losses is significantly lower in this loan compared to other forms of loan for personal use. Given the lower risk, gold loa...

Mutual Fund Review: ING Dividend Yield

  ING Dividend Yield's small assets enable the fund manager to churn in impressive returns… Strategy The aim of the fund is to invest in stocks which offer a high dividend yield. This fund deploys a value based strategy which aims to gain from investing in fundamentally strong and free cash flow generating businesses. The scheme focuses not only on growth but also on the cash generated by the business, which mostly leads to stable returns even in volatile markets. This fund has a low volatility because of its investment in high yielding stocks. The scheme tries to include stocks that yield dividend above the dividend yield of the Nifty and stocks with liquidity, which throws up a universe of 150 stocks.   Our View Launched in October 2005, this fund invests at least 65 per cent of its assets in high dividend yield stocks. The fund has consistently maintained a mix of stocks across varying market capitalisation, with a higher tilt to mid caps compared to small caps. Howev...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now