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Yield Bond
Many things can be an important consideration for an investor to invest in bonds. One important factor is the yield. In general, the yield means the acquisition of the yield (return) of bond investment within a year. Therefore, the yield of the bond is sometimes also equivalent to the interest rate of the bonds within 12 months.
Since we learned about the bond, we always discuss that investors buy bonds to held to maturity. However, in fact, the bonds do not have to be waited until maturity.
Just so you know, any time the investor can sell the bonds in the market. Therefore, bond prices can fluctuate in the market. But, before discussing about the price, we must first understand the concept of yield.
Yield is a number that indicates the level of yields or profits derived from bond investors.
The simplest way to calculate yield is the formula: interest rate divided by the price of its bonds. Therefore,if you buy a bond at face value, the bond yield equivalent to the interest rate. Well, so the price of the bond was unchanged, its yield will also change.
For example, if you buy a 10% interest bonds face value at 100 billion (10 billion interest), meaning bond yield was 10% (10 billion / 100 billion).
But, if the price of the bonds fell to 80 billion, its yield will increase to 12.5% (10 billion / 80 billion). Conversely, if the price of that bond to 120 billion, its yield to 8.33% (10 billion / 120 billion).
The conclusion is: the yield is always inversely related to bond prices. That is, when prices fell, bond yields will rise. And vice versa.?
Bond yields are also very dependent on the price of these bonds. Meanwhile, the price of the bond itself is dependent on many factors.
In addition to the factors of demand and supply, macro-economic conditions and trends in interest rates also affect the movement of bond prices in the market.
For a more in-depth understanding of the relationship with the yield or yield bond prices, investors should also understand the concept of the price of the bond itself.
In the market, the price of the bond expressed as a percentage of the face value. At the time of the initial issuance of bond prices usually amounted to 100. That is, to buy bonds, investors must pay 100% of the face value.
As the market mechanism, the bond price can go up or down. Put it said bond prices dropped to 95. This means that, to buy bonds worth 100 billion, enough to pay investors 95 billion or 95% of the face value.
Well, the bond price movement itself depends on many factors. In accordance formula market, the more demand and the less the supply, the price of a bond will increase.
In addition, the macro-economic conditions and the trend of domestic interest rates and abroad are also highly influence bond prices.
Specifically related to the interest; if interest rates decline, bond prices will tend to rise. This happens because investors tend to hunt the old bonds that still offer high interest. Now, investors are willing to obtain a low yield bonds to pursue it. Therefore, when prices rise, bond yields declined.
If interest rates rise, bond prices in the market are actually going down. This happens because investors want a high yield of bonds in the market to offset the increase in interest. Well, high yields can only be achieved if investors bought the bonds at a low price. ?
In addition to the concept of yield or simple yield there is also the concept of yield to maturity (YTM) is more complicated.
But, the concept YTM more salable because it describes a complete bond yields. Aside from the interest on the bonds, YTM also calculate the potential gains or losses of bond price movements.
We have mentioned that the yield or a simple bond yield can be calculated by dividing total interest in one year the price of these bonds. Yield generated by the formula are often referred to as a current yield because only based on the current market price of the bond.
However, once again, this is a simple formula yields. There’s more yield calculation formula is more complicated, the yield to maturity (YTM). Well, if talking about the yield, investors and analysts usually refer to this YTM.
YTM is the yield that can be given a bond with the assumption that investors will remain tucked bonds until maturity. In addition there are a series of other assumptions. Namely that the bond issuer pays all coupon bonds and investors reinvest the interest income with the same level of benefits with current yield.
Not only that, YTM also includes potential profit from rising bond prices or capital gain (if you buy the bonds at a discount) or loss due to the decline in bond prices (if you buy a bond at a high price or premium).
In short, all the advantages of bond YTM calculate if it is held until maturity. However, the YTM is usually displayed in the effective rate of profit in one year.
