THE DIFFERENT METHODS OF BOND YIELD ANALYSIS IN THE MARKETRealization of a yield in the bond market means that the maturity stage has been realized and that the expected returns on the bond have been paid (Ariel, 2010). Security debts in the financial markets are most commonly caused by those bonds with high yields. The time frame by which a bond stays in the market will determine the level of interest rate that it will be charged. For instance, if the bond takes a shorter time then the interest rate most probably will be lower than when it stays for a longer period of time.
(Vasikcek, 2003) argues that the realized yields on bonds are expressed as a percentage on the return got from the investment. Investors who therefore want or wish to invest in this market are advised to equip themselves with the proper knowledge of the market and the risks involved. There are different ways of measuring bond yield, some of which include; yield to put, yield to maturity, current yield, yield to cost, yield to call, cash flow yield, yield to worst and yield to portfolio.
The bonds that yield high returns in the market are those debt securities that last for a longer period of time and are charged a lower interest rate. According to (Vasicek, 2003), the investors that give out high yield bonds in majority of cases do so in order to increase their capital to enable them expand their businesses and also for the purposes of improved cash flow in their companies. Mathematically, the general formula for bond yield is as follows; P=Where CFt = cash flow for the year t P = price of that investmentN = number of yearsThe above mentioned types of bond market yields can further be discussed below; Yield to maturityThis can be defined as that total amount the investment has earned at the end of the period it was invested that the investor expects to get (Chambers and Carleton, 2001).
Another definition according to (Ariel, 2007) is the rate of interest that can be used to equate the investments present value to that of the initial cost of investment. This should not however confuse one with stock yield as bond yields are paid according to the investment value making it more complicated that the stock yield.
This yield that is gotten from the bond reflects the capital gain or loss and also the investment return at the end of the period the bond was invested. It is represented mathematically as; P= Where C- interest on the couponP- Price of bondN- Time periodM- Maturity valueConsider the following example; The table below shows Mr. Bens debt obligation to be paid as followsNumber of yearsCash flow in $1250215032004350If the interest rate per year is 5%, what is the yield to maturity? Solution250/ (1+0.05)1 + 150/ (1+0.05)2 +200/ (1+0.05)3 + 350/ (1+0.05)4= 238.1 + 136.05 + 172.77 + 287.95= $ 834.87Current yield We can calculate current yield by expressing the annual yield income as the total percentage of the bond return of the investment as per the prices of the market.
The investor therefore in this case will earn the bond percentage rate of investment calculated annually. The market price in this case is calculated based on the par value of $100 annually as it often relates to the rates of interest.
Current yield is calculated by dividing the annual rate of interest of the coupon by the bond prices, i.e;