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How to calculate bond yield when no interests are paid?

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These series differ by two factors – buyback option, and payment of interest.

We looked at the buyback option and how it affects bond yield earlier, and now let's look at payment of interest. One series pays out interest annually, whereas the other series doesn't pay out any interest annually, but rather pays a lump-sum at the end of the time period.

Let's first look at the yield for the series that pays a lump-sum.

You already know what your effective purchase price is, and you also know what you will get at the end of the time period, so all you need to do is to plug in these numbers in the Compounded Annual Growth Rate (CAGR) Calculator and see what the yield is.

Conceptually you are saying that if I start out with Rs. 3,455 (30.9% tax rate) then what is the rate of interest at which I should invest this sum, and also the interest earned every year, so that I reach at the amount at the end – Rs. 7,180 (series 4 example).

Here is how that table looks like.

Investment Amount

Tax Slab

Effective Purchase Price

Series 2 Yield

(CAGR)

Series 4 Yield

(CAGR)

5,000

30.9%

3,455

12.06

15.74

5,000

20.6%

3,970

10.52

12.57

5,000

10.30%

4,485

9.18

9.86

Buyback Amount

———–

——-

10,800

7,180

Time in years

———–

——-

10

5

The post about CAGR also details how it is calculated, so you can read more there.

In future to calculate any bond yield where there are no annual interest payments look for these elements:

  • Face Value
  • Tax Bracket
  • Effective purchase price
  • Time in years
  • Buyback amount

Then use effective purchase rate, time and buyback amount in the CAGR calculator to find out the yield.

Happy Investing!!

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