Return on investment is one of the key drivers for your investment decision. In the case of bond investment, bond yield represents your return on investment. It is the percentage return on a bond investment and is represented as the ratio of the annual coupon payments to the bond’s current market price. The higher the bond yield, the better the return on investment. But how can you calculate bond yield? Is there a bond yield calculator available that automates our return calculation and shows accurate results? Let’s find out!
Before understanding bond yield calculation, it is important to understand what is bond yield. As stated earlier, bond yield is the return on the investment you made in bonds which and is denominated in percentage. It indicates the returns you can earn as per the prevailing bond price. The higher the bond yield, the better the returns. This is what makes it a key driver in bond investing decisions.
Calculating bond yield is simple. It shows the ratio of how much interest you earned as compared to the current market price of the bond. This indicates how much returns bond yields today. For calculating bond yield, the following two pieces of information are required:
This is the rate at which the bond pays interest to the investor. Suppose a bond is priced at Rs. 1000 with a coupon rate of 8% per annum. Thus, the bond will pay an interest of Rs. 80 annually to the investor.
This is the current market price at which the bond is trading today.
Following is the bond yield formula to calculate bond yield:
Bond Yield = Coupon amount / Current market price of the bond * 100
To calculate the bond yield, divide the bond’s annual interest payment by the bond’s current market price. For example, let’s say you have invested Rs. 1,000 in a bond with a 8% coupon rate that pays interest annually. The annual interest payment would be Rs. 80 (8% of Rs. 1,000). The bond’s current market price is Rs. 950. So, the bond yield today should be calculated as follows:
Bond Yield = Coupon amount / Current market price of the bond * 100
= Rs. 80 / Rs. 950 * 100
= 8.42%
This is how a yield calculator works.
Generally speaking, the higher the yield to maturity YTM, the better return you can expect on your investment. However, it’s important to remember that yields can fluctuate over time due to change in the current market price of the bond. So, monitor your bonds closely to ensure they are still performing as expected.
Yield to maturity YTM is another significant parameter to measure the bond’s performance. While the bond yield measures the annual return that the bond has provided, yield to maturity measures the annual returns provided by the bond over the total investment tenure.
Here’s how to calculate yield to maturity using the YTM formula:
Yield to Maturity = [Annual Interest + {(FV-Price)/Maturity}] / [(FV+Price)/2]
where,
Annual interest = Interest paid annually by the bond
Face Value = Face value of the bond
Price = Current market price of the bond
Maturity = Number of years till maturity
Thus, yield to investment considers the overall returns over the life of the bond. Let’s understand how to calculate YTM with a practical example:
Continuing the above example, suppose the life of the bond is 5 years. Following is the complete data for the bond:
Annual interest = Rs. 80
Face value = Rs. 1000
Current Price = Rs. 950
Maturity = 5 years
Therefore, we can calculate the YTM of this bond using the following YTM formula:
Yield to Maturity = [Annual Interest + {(FV-Price)/Maturity}] / [(FV+Price)/2]
= [Rs. 80 + {(1000-950)/5}] / [(1000+950)/2] * 100
= 9.23% per annum
That means, the bond will yield returns at the rate of 9.23% annually till its maturity.
Of course, calculating yield is just one part of making intelligent investment decisions. It would be best to consider risk tolerance and objectives before putting your money into a security.
While the formula may seem daunting and highly time/ effort consuming, IndiaBonds has simplified the task of calculating Bond yield online for you in seconds! You can calculate the YTM of any bond of your choice easily in a matter of seconds using the YTM calculator.
Steps to Use IndiaBonds Bond Calculator:
Using a bond yield calculator can make the bond yield calculation really simple, whether it’s current yield or YTM. It allows you to calculate both the current yield as well as yield to maturity. When you are trying to calculate the bond yield through a bond calculator, there are a few things that you will need to take into account. The first is the par value of the bond, which is the face value of the bond that is being traded. The second thing you will need to look at is the coupon rate. Finally, the last thing that you need to consider when you are trying to calculate the bond yield is the market price of the bond. The following are the benefits of using the intuitive bond calculator provided by IndiaBonds:
Available for everyone who want to calculate bond price or yield online , whether they are professionals, individual investors or keen learners. Simply sign up to start using the calculator.
The bond calculator empowers investors by giving them access to crucial bond information like real-time cashflow calculations. So investors can calculate the bond yield and price instantly
The flow is very easy and logical where all you need is to enter the price to calculate bond yield or desired yield for an equivalent price. You can get calculations on 1000s of bonds and their yield to maturity in India at your fingertips and even on the move!
This calculator is available for everyone at any time of the day. There is no wait time to use the Bond Calculator.
The bond calculator does not simply just tell you bond’s, YTM and bond prices. It actually gives you a detailed breakup of principal, accrued interest and total settlement amounts. It also lets you adjust settlement dates to match your cash flows. The calculator takes into account the holiday calendars as well for accuracy.
The bond calculator lets you compare and swap between bonds with ease. Quickly continue from the bonds you were working on once logged in on the calculator. This is designed to make your life simpler!
This calculator allows you to easily request for a bid or offer price on any particular bond of your choice with ease. While IndiaBonds has the largest inventory of bonds on offer, we are more than happy to accommodate your requests and work towards delivering your investment goals.
The calculator provides users with the exact settlement amount that is precise to the 4th decimal place, making it highly precise. Customers therefore now have a better understanding of the amount they have to pay.
What investors get out of the bond yield calculator is not just the yield or the price information, but the real time statistics to the specific bond. This is only possible if the calculations are derived using cashflows that are built in the calculator. Since IndiaBonds has a repository of the largest number of cashflows in the country at the client’s disposal, users can calculate & invest real time.
Although there are many different ways to calculate bond yield, the bottom line is that it can be a complex and hassle filled process for investors new to this form of investing. Following the steps outlined in this article, you can get an accurate yield for any given bond in India. Alternatively, you can save time and use IndiaBonds Bond Calculator to calculate bond yield or price accurately in seconds. Once you have that information, you are equipped to make more informed decisions about which bonds are worth investing in.
A: The primary difference between bond current yield and yield to maturity is that while the bond yield calculates the current yield of the bond in the current year, the yield to maturity (YTM) calculates the annual return of the bond over its life.
A: It depends upon the type of bonds you invest in. But it can be said that bond investments are relatively safer than equity instruments.
A: Bonds are ideal passive income-generating instruments. Further, they are a great diversification option for the portfolio and therefore are ideally suited for all investors.
Disclaimer: Investments in debt securities/ municipal debt securities/ securitised debt instruments are subject to risks including delay and/ or default in payment. Read all the offer related documents carefully.
