Monthly Archives: September 2013

Bond yield calculations | Bond earnings

The earnings on a bond are known as its yield. The yield is based on the bond purchase price and interest rate.A bond’s yield can be current yield or yield to maturity or yield to call.

A bond’s current yield is calculated by dividing the annual interest payment by the bond purchase price and is referred to as basis points – bps. One basis point is 1/100 of 1%
i.e. essentially (1/100)*(1/100) which equates to .0001.

So if the purchase price of a bond is $1000 and interest is 5%, the annual interest payment is
$50. The bond yield will be 50/1000 which is 5% which is (5/100 / 0.0001) or 500 basis points.

If the purchase price of a bond is $900 and interest is 5%, the annual interest payment is $50.
The bond yield will be 50/900 which is 5.56% which is (5.56/100 / 0.0001) 556 basis points.

The yield to maturity is the total earnings derived from the bond if it is held to maturity
including interest earned and any loss or gain of principal. Similar to yield to maturity is
yield to call which is the total earnings of a bond until it is called which is generally before
maturity date.

What are bonds | Basic bond terms

A bond represents money lent. Buying a bond essentially means you are lending money to the entity selling the bond. This entity could be the Government, a company, a municipality, a federal agency or a private agency sponsored by the Government.The amount that you pay to purchase a bond is called the face or principal value. Bonds pay an interest which is a percentage of the face value. When interest is paid in installments – generally semi-annually, it is called a coupon payment. Bonds can be short term or long term going to several years. When the duration of the bond interest payments is over, the bond is said to have matured. When the bond matures the purchaser of the bond gets back the face value of the bond.

When bonds are first issued, the price is the same or very close to the face value. When bonds are purchased in the secondary market the price that you pay can be higher or lower than the face value. When the price is higher than the face value the bond is said to be selling at a premium. When the price is lower than the face value it is said to be selling at a discount. When the price is the same as the face value, the bond is said to be selling at par.

The price of a bond fluctuates depending on factors such as interest rates, maturity of the bond, credit rating of the bonds, liquidity, supply and demand and general market conditions.

Bonds can have a fixed interest rate or a floating interest rate pegged to the treasury rate,  LIBOR or other standard interest rate index.

Bonds can also be zero-coupon. This essentially means that interest is not paid during the life of the bond but only when the bond matures.

A bond’s yield refers to the return earned on the bond based on its interest rate and price paid.

Bonds can be of various maturities – short term which are generally 1 to 5 years, medium term which are 5 to 12 years and long term which are for maturities of longer than 12 years and generally upto 30 years.

Bonds can have call and put provisions. The bond issuer can specify a price and date that the bond can be redeemed before maturity. Such callable bonds generally have higher interest rates. Bonds that have a put option allow the bond purchaser to sell the bond to the issuer at a price and date before maturity. Such bonds generally have lower interest rates since the risk to the purchaser is less.

Companies may issue bonds that are convertible to stock. These bonds also have a lower interest rate since they may be converted to stocks.

 

Sell your own home make more money

Consumer reports have shown that when home owners sold their own homes, not only did they save on hefty realtor commissions, but they also got higher prices. In fact homeowners received $5,000 less on average when they sold through a realtor. When they sold on their own, they almost always got their original asking price.This should come as no surprise since realtors are in it for the money. The more houses they sell the more money they make. Realtors almost always deal with other realtors and both parties in wanting a quick transaction often lower the price of the house to bring about a quick sale.

Even when renting out, it is best to try and do so yourself. Realtors take a commission that equals to either one month rent or 10% of the annual rent. In addition many realtors have a built in clause whereby every year that the tenant renews the lease, the realtor again gets a commission. This can cut into any profits you can make from leasing and may even make it economically unfeasible to rent.

Moreover unlike a house sale, where once the house is sold you simply walk away, in case of rental properties, you have to “live” with a tenant that the realtor gets. If the tenant leaves or simply defaults on paying the rent or causes other problems, it becomes your headache to deal with and to go through the motions again of getting another tenant. If you were to use a realtor again …then you guessed it, realtor’s commission to be paid once again.