The initial yield of a bond is the percentage that an investor can expect the bond to make at the beginning of the bond account. The initial yield will depend on the interest rate the bond pays. The interest the bond pays is a constant because it depends on the coupon rate of the bond, and the coupon rate will never change. The other factor for the initial yield is the market price of the bond. The market price of the bond is dependent on the current market interest rate, so the market price of the bond will fluctuate with the market.
- Skill level:
Calculate the annual interest payments by multiplying the stated interest rate by the bond's face value. For example, a five-year £65,000 bond has a stated interest rate of 3 per cent. Therefore, £65,000 times 3 per cent equals an annual interest payment of £1,950.
Determine the current market price. The current market price is a function of the present value of the bond payments and the present value of the face value of the bond. The calculation for current market price is very complicated, so investors will just use the price they first pay for the bond. In the example, the investor pays £63,050 for the bond.
Divide the annual interest payments by the market price of the bond. In the example, £1,950 divided by £63,050 equals 0.030927835 or 3.0927835 per cent.
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