Essays on Bond Yield Measures Inform Investors of the Rate of Return on Bonds Under Different Assumptions Assignment

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The paper 'Bond Yield Measures Inform Investors of the Rate of Return on Bonds Under Different Assumptions' is a great example of a Macro and Microeconomics Assignment. A bond is a long term debt security sold to investors particularly by large companies or the government (Bodie & Marcus, 1996). Bonds are some of the means used by large companies to raise capital. Investors always go for the bonds with the highest rate of expected return. Determining the bonds with the highest expected rate of return is one of the major tasks investors have to face when deciding whether to buy or sell particular bonds.

The investors have to measure the yield of the bond. Bond yield refers to the figure showing the return the investor gets on the bond. Bond yield is always expressed as a percentage. Return on investment on bonds by investors comes from first from coupon payments received annually or semi-annually except for zero-coupon bonds. Secondly, they come from reinvestment gains earned from coupon receipts received periodically (Shape, 1999). Thirdly, the returns arise from capital gain or loss upon the sale of the bond before maturity.

There are three measures used to measure bond yield. Current yield measure/ Realized YieldThis measure of bond yield measures the rate of return of the bond in connection to the current market price. To get the current yield, the coupon interest (annual) is dived by the prevailing market price. This measure does not take into consideration the capital gain or loss investors will realize if the bond is sold at a premium or at a loss (Bodie & Marcus, 1996). The current yield calculation measure, therefore, takes into consideration only the coupon interest.

The current yield measure ignores other sources through which a bond obtains returns and does not take into account the time value of money. Current yield measures cannot be used for zero-coupon bonds. The current yield is calculated using the formula below: Current yield= Annual coupon payment/ Market price (as a % of the face value/par value of the bond)For example, if an investor purchased a 3-year bond for $951.90 with a coupon interest of 10% annually with a par value of $1000.

The current yield will be calculated as follows.

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