How is the yield of a bond calculated?
24.1 An investor who purchases a bond can expect to receive a return from one or more of the following sources: The coupon interest payments made by the issuer; Any capital gain (or capital loss) when the bond is sold; and Income from reinvestment of the interest payments that is interest-on-interest. The three yield measures commonly used by investors to measure the potential return from investing in a bond are briefl y described below: i) Coupon Yield 24.2 The coupon yield is simply the coupon payment as a percentage of the face value. Coupon yield refers to nominal interest payable on a fi xed income security like Government security. This is the fi xed return the Government (i.e., the issuer) commits to pay to the investor. Coupon yield thus does not refl ect the impact of interest rate movement and infl ation on the nominal interest that the Government pays. Coupon yield = Coupon payment / Face Value Illustration: Coupon payment: 8.24 Face Value: Rs.100 Market Value: Rs.103.00 Cou
