![]() If you noticed in both examples, while the percent is different, the payment is the same. This is because when calculating a bond's interest rate, you only need to worry about the coupon. While this may seem complex, you do not need to worry.Since the bond's coupon is only $50, the market price must fall to $500 when the interest rate is 10% to be marketable. For example, if long term interest rates rise from 5% (the coupon rate also) when the bond was purchased, the market price of a $1000 bond will fall to $500. The reason bond market prices change is due to fluctuations in the market.As bond prices drop the percent yield goes up. Since a bond's yield is the coupon payment as a percent of its current value, the coupon ($50) would be 10% of the current value ($500). Pretend now that the price of your bond dropped to $500 in the first year due to a change in interest rates in the marketplace. This bond pays you a 5% coupon, or $50 per year. For example, pretend you purchased a bond with a face value of $1000.Sometimes bond prices go up and down, meaning the price of your bond can change from what your face value is. This is because the value of your bond can change over time, and yield is the bond's annual coupon payment as a percent of its current value.For example, the bond's coupon may be 5%, and the bond's yield may be 10%. Sometimes when you look at bonds, you will see both a yield and a coupon.It is important to know the difference between a bond's yield, and a bond's coupon payment in order to not get confused when calculating interest payments. It is important to remember the coupon is always an annual amount.ĭistinguish between a bond's coupon and a bond's yield. In this case, the coupon would be $50 (0.05 multiplied by $1000). For example, you may see a 5% coupon on a bond with a face value of $1000. A bond's coupon is typically expressed as a percentage of the bond's face value. ![]() A coupon can be thought of as a bond's interest payment. Some bonds for example are 10 years in length, others are 1 year, and some are as long as 40 years. By knowing a bond's maturity, you can also understand the length of a bond's term. This is the date that the principle is to be returned to the investor of a bond. Maturity.The end of a bond's term is known as maturity.That is to say, the amount you initially loan out, and that you expect to be paid back at the end of the bond's term. The face value of a bond can be thought of as its principal. The world of bonds has its own unique terminology, and understanding these terms are necessary to be able to not only properly invest in bonds, but to calculate the interest payment of a bond. Learn the terminology for calculating a bond's interest payments. ![]()
0 Comments
Leave a Reply. |