Nominal income
The nominal income (nominal yield) - this is a fixed income, defined by the percentage assigned to the bonds with the issue. It is also called the coupon rate. If a bond has a value of $ 1000, and the coupon rate is 10%, the investor will receive interest of $ 100 per year, which will be paid semi-annually for $ 50. Yield. By investing in bonds, it is important to remember that investment involves risk. The more risky a bond is, the higher it is, as a rule, its profitability, because it is designed to reward the investor for the risk assumed. Current yield is calculated by dividing the annual income for the coupons to the current market price of the bond. For example, if the current price is $ 1000, and the coupon rate is 8% ($ 80 per year), the current yield is 8% ($ 80 divided by $ 1000 and multiply by 100%). If the bond is traded at $ 900, and the coupon rate is also equal to 8% ($ 80 per year), the current yield is already 8.89% ($ 80 divided by $ 900 and multiplied by 100%). The current yield on discount securities is calculated by dividing the discount on the difference between nominal value and discount. Yield to maturity (yield to maturity) or return to the early repayment (yield to call) are more important indicators than the current yield, and provide an opportunity to compare bonds with different maturities and coupons. The difference in returns of two bond returns is commonly referred to as spread (yield spread). In fact, the yield to maturity is the discount rate at which future earnings on the bonds would be equivalent to the current price. In calculating the yield to maturity takes into account the sum of all interest payments received by the investor from the moment of buying the paper to maturity, as well as a discount (in the case of buying the bond below par) or premium (if buying at a premium). Yield to maturity bonds illustrates the real value of the securities for investment portfolio and, therefore, is one of the most important indicators that need to be taken into account when deciding whether to purchase the bonds.
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