By Esme Faerber
The common source of revenue investor does not wish or have to get slowed down in technical discussions of rates of interest and time. So All approximately Bonds and Bond Mutual cash supplies them what they wanta easy but complete remedy of bonds and bond cash. besides up-to-date bond info, this revised variation additionally contains new fabric on: * Bond mutual cash * Tax-free municipal bonds * foreign bonds and bond cash
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Extra info for All About Bonds and Bond Mutual Funds: The Easy Way to Get Started
The current yield is determined as follows: Coupon interest amount Current yield ϭ ᎏᎏᎏ purchase price of the bond For example, if a bond is purchased at par, $1000, and the coupon is 5 percent (interest will be $50 per year), then the current yield is 5 percent (same as the coupon yield). However, on the secondary market most bonds trade above or below par. 54 percent (50/1100). There is a relationship between bond prices, current yields, and coupon rates. Bonds trading at a discount to their par values have current yields which are higher than their coupon rates.
Certain bonds sell at premiums and others sell at discounts. There is a mathematical formula for determining the price of a bond, but bear in mind that this is conceptual. The market price 42 CHAPTER 2 of a bond depends on the stream of the bond’s coupon payments and the principal repayment in the future. Using the time value of money, this stream of future payments is discounted at market rates of interest to its present value in today’s dollars. It is the same formula used in the financial calculator for yield to maturity, except you solve for PV (present value) and input i (yield to maturity) that reflects market rates of interest and a risk premium.
Bonds that have a strong capacity to repay principal and interest but may be impaired in the future. Medium-grade quality. Interest and principal are neither highly protected nor poorly secured. Lower ratings in this category have some speculative characteristics. Speculative bonds with great uncertainty. In default. Individual investors should stick to issues with ratings of BBB and above to ensure against sleepless nights. However, these ratings provide only a relative guide for investors, because the financial status of the issuer could deteriorate over time and result in the issue being downgraded to a lower rating.
All About Bonds and Bond Mutual Funds: The Easy Way to Get Started by Esme Faerber