value and yield of bonds
Bond is a debt security, which certifies the loan relationships between the owner (the lender) and the person who has issued the bond (the borrower).
The current legislation determines the bond as «emission valuable paper, enshrining the right of its holder to receive from the Issuer of the bonds within the period specified by it of its nominal value and fixed interest on the value of assets or other property equivalent». Such thus, a bond is a debt certificate, which has two main components:
the Issuer's obligation to return the holder of a note after a certain period of the amount specified on the face of the bonds;
the obligation of the Issuer to pay the holder of bonds fixed income in a percentage of the nominal value or other property equivalent.
The value and yield of bonds
The bonds have a nominal (face) price and the market price.The par value of the bonds is printed on the notes and indicates the amount which is taken a loan and shall be returned upon expiration of the bond loan. The nominal price is the base value for the calculation of the amount of income. Interest on the bonds is set to the face value and the increase (or decrease) in the value of bonds for the period is calculated as the difference between the nominal price at which the bond will be repaid, and the purchase price of the bonds.
Bonds mostly focused on wealthy investors, both individual and institutional. Therefore, they, as a rule, are produced with a higher nominal price. In this they differ from shares, nominal value of which the Issuer sets in the calculation of the acquisition of the broad layers of investors. It should be noted that if the shares par value - the value of the quite relative, as the shares are sold and bought, as a rule, at the price of, not tied to the face value of the bonds par value is a very important indicator, the value of which does not change over the life of the bonded loan. It is for a fixed value of the nominal value the notes will be extinguished at the end of their treatment.
Bonds from the moment of their issuance and maturity are bought and sold in established market prices. The market price at the time of issue, namely the issue price may be lower than the nominal value, equal to the face value and above the face value.
The market price of a bond is determined based on the situation on the bond market and the financial market as a whole at the moment of sale. The market price of the bond depends on a number of other conditions, the most important of which is the reliability of the contents, i.e. the degree of risk, the level of interest rates, period of circulation of bonds, maturity, etc.
In General terms, the current price of the bond can be represented as a value of expected cash flows, adjusted to the current moment. As is known, the cash flow is composed of two components of coupon payments and bond face value, to be paid at redemption. Thus, the price of the bond is the present value of annuity and lump sum of the nominal prices. Fixed the current yield on the bonds is a fixed annuity, i.e., annual fixed payment for a number of years.
In the world practice in addition to the nominal and market prices is another valuation of bonds, their redemption price, i.e. the price at which the Issuer on the expiration of the term of the loan redeems the bonds. The redemption price may be the same as with a par, and may be above or below it.
Income on bonds
Bonds, as well as other securities that are the object of investing in the stock market and bring to their holders certain income.
The gross income from the bonds is composed of:
periodically payable income (coupon yield);
changes in the value of bonds for the corresponding period;
income from the reinvestment of the received per cent.
Let's consider each component of income.
Firstly, as already noted, the bond, unlike stocks, brings its owner a fixed income. This income represents fixed annuities, i.e. annual fixed payment for a number of years.
The amount of the coupon income on the bonds depends primarily on the reliability of the Issuer. The more reliable the Issuer, the less the proposed percentage.
Interest coupon payments on the bonds can be conditionally divided into three groups:
fixed annual payments at a rate of, established by the Issuer in issuing the notes;
index-linked annual payments;
coupon income is paid simultaneously with the principal.
Secondly, the bond can bring income changes in the value of bonds for the time from the moment of its purchase to sale. The difference between the purchase price of the bonds and the price at which an investor sells a bond, represents the increase of the capital invested by the investor in a particular bond.
This type of income is brought first of all bonds, which are sold at a price below the nominal value, i.e. at a discount. When buying and selling of bonds with a discount of an important point is the definition of the sale price of the bonds.
Thirdly, the note bears the income from the reinvestment of the received per cent. However, this income can be obtained only on condition that received in the form of interest income on bonds permanently reinvested. This type of income can be quite significant when buying long-term bonds.
Total, or aggregate, the income on the bonds, as a rule, is lower than for other securities.
The yields of bonds
In practice, the decision on investment of funds must pass the examination from the point of view of the effectiveness of investments, which can be determined by examining the profitability of one or another operation.
Under the income understand the amount of the income from the investment of the funds, i.e. on origination of assets in debt, correlated with the cost of obtaining the amount of income.
In General terms, the yield is a relative measure and is the income per unit of cost. Distinguish the current yield and complete, or the final yield of the bonds.
The indicator characterizes the current yield annual (current) income on bonds on costs for its purchase.
The current yield of the bonds is a simple characteristic of the bonds. However, this indicator does not reflect another source of income is the change in value of bonds for the period of ownership. So on bonds zero coupon current yield is equal to zero, although the income in the form of a discount she brings.
Both sources of income are reflected in the index of a finite or full yield, which characterizes the full income on the bonds falls on a unit cost on purchase of the bonds.
