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Yield and Return - BME
Yield and Return - BME
Yield and Return - BME
Dr HK Pradhan
Professor of Finance & Economics
XLRI Jamshedpur
Concepts
▪ Current yield is the ratio of its annual coupon to its closing
price.
▪ Yield to Maturity is the yield that equates the purchase price
of the bond to the present value of its future cash flows. It is
the most widely used measure of a bond's rate of return.
▪ Annualized Yield is the rate obtained by multiplying the
simple Semi-annual periodic discount rate by two.
▪ Average Rate to Maturity (ATRM) is the simple annual coupon
+ amortization income
▪ Yield to Call, YTC, is the rate obtained by assuming the bond
is called on the first call date. Like the yield to maturity, the
YTC is found by solving for the rate that equates the present
value of the bond’s cash flows to the call date(s) to its
market price.
Concepts of Yield
▪ The yield to maturity YTM) of a 18-year , 6% coupon bond selling for Rs
700.89, with a per value of Rs 1000
30 30 30 1030
700.89 = + + ..... +
(1 + 0.0475)1 (1 + 0.0475) 2 (1 + 0.0475) 35 (1 + 0.0475) 36
Ct M
P = t =1
n
+
(1 + y ) (1+ y )n
t
Capital gain(loss) = Pt − P0
Example: 15 year 7% bond, par value 1000, Price 769.40,
YTM 10%
Coupon Interest + Interest on Interest =
(1 + 0.05)30 − 1
35 = 2325.36
0.05
Coupon Income = 35 x 30 = 1050.00
G-Sec 7% 3 8.75%