Analysis of Bond YieldIn many cases, high yield bonds are usually debt securities in financial markets with lower interest rates. The lower interest rates are determined according to the period of time it has stayed. The issuing entities of the high yield bond usually do this to raise more capital to expand businesses and also to improve the cash flow in the company (Jamshidian, 2000). When the bonds are left to maturity and the expected return on it realized, then it is said to have realize a yield. (Vasicek, 2003) adds that such yields can be defined as a percentage on the return on investment.
Therefore, there are categories of yields types which markets currently offer. Such include: Current YieldThere is a consensus that Current Yield is regarded as annual yield income expressed as a total percentage of overall cost of the bond or return on the investment expressed in market price (Chambers and Carleton, 2001). In current yield, the bond yield is usually calculated based on $100 par value. Giving a practical example of the above statement; Mr. Steve has a bond which has annual coupon rate of 15% and it costs $ 20,000.In order to calculate the current yield of the bond based on the rate and the amount above, 15/1000 = 15%But if you paid $ 24,000 = 15/240 = 6.25%And if the bond cost is $19,000 then = 15/190 = 7.5%Ariel, (2010) explains that calculations above or rather, estimating values of the current yield is vital in that it helps investors to compare other investments opportunities such as the trust income of common shares.
On the other hand, current yield values have two disadvantages; firstly, when an investor hold a bond to maturity then the bond price has been locked as par.
Secondly, the current yield only considers the interest rate of the coupon but such excludes time factor of the bond. Yield to MaturityThe relationship of the bonds can be interpreted differently owing to the fact that they are repaid as par value of the investment. This is also the aspect that differentiates it from the stock yield of an investment. The yield on the bond reflects both the return on investment and the capital loss or gain on an investment by the end of the investment period.
Yield to maturity thus is be defined as the return on the investment an investor expects by the end or at the maturity of an investment (Chambers and Carleton, 2001). An economical or mathematical interpretation of the above assertion is; P = Giving a worked example; Let’s take and an investor by the name Malike. He has a bond worth $ 19,000 and has a coupon interest rate of 10% annually. If the maturity period of the bond is 5 years, calculation of the yield to maturity will be; Solution19,000/ (1+0.1)1 +19,000/ (1+0.1)2 + 19,000/ (1+0.1)3 + 19,000/ (1+0.1)4 + 19,000/ (1+0.1)517,272 + 15702 + 14275 +12977 + 11798= 72,024The yield to maturity can also be calculated using approximate yield to maturity method. Approximate yield to maturity is done by averaging the purchase price of a bond and its redemption price in the market. [(Interest income +annual price change) / (purchase price + 100)/2]* 100Yield to callThere are some cases whereby the issuer of the bond can decide to call his or her bond during the first date of call; the yield gotten from such kind of a bond is called a yield to call.
The use of call date as the maturity date of the bond in the yield to call is what makes it different from the call to maturity yield. In most cases, investors calculate both yield, that is, yield to maturity and yield to call. The lowest value of the two will actually give the most promising investment return. One most important thing to note when calculating yield to call is that it is normally assumes the interest of coupons in any bond.