Bond interest yield 


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Bond interest yieldYield calculations on bonds aim to show the return on a gilt or bond as a percentage of either its nominal value or its current price. There are three types of yield calculation that are commonly used:Nominal YieldThis is calculated by dividing the annual income on the bond by its nomina or 'par' value. So the nominal yield on a £100 bond which pays 5% interest per year is 5/100 x 100 = 5%.Current or 'Running Yield'This is calculated by dividing the annual income on the bond by its current market price. So if the market price of the £100 bond dropped to £95, the current yield on the bond at that time would be 5/95 x 100 = 5.36%. Note that as the market price of a bond drops, its yield goes up.Redemption Yield'The Redemption Yield shows what the total return on a bond would be if held to its maturity date. It reflects not only the interest payments a bondholder will receive, but also the gain/loss he will make when it matures. The income element is the same 'current yield' calculation performed above. The gain/loss element is calculated by taking the difference between the current market price and the nominal value of the bond (e.g. in our example 100  95 = 5), dividing it by the number of years til maturity (assume 5 years for simplicity, so 5/5 = 1) and then dividing that figure by the current price of the bond (1/95 x 100 = 1.05%) The yield to redemption is the sum of the current yield (5.36%) and the capital yield (1.05%) = 6.41%.Similar MatchesApplied or nominal interest rateApplied or nominal interest rateThe rate used to calculate the interest due. Deferred interest mortgageDeferred interest mortgageInterest is not paid during the deferral period. When the period is over, the accumulated interest is added to the original loan. Some lenders add this interest to the total of your loan to give a new loan figure and new interest payments. Others calculate your interest payments on the original loan as normal and then spread the repayment of the deferred interest over a set period of time. The latter method is better for you, as adding the deferred interest to the loan means you end up paying interest on the deferred interest! Capitalized interestCapitalized interestInterest that is not immediately expensed, but rather is considered as an asset and is then amortized through the income statement over time. Interest only strip (IO)Interest only strip (IO)A security based solely on the interest payments from a pool of mortgages, Treasury bonds, or other bonds. Once the principal on the mortgages or bonds has been repaid, interest payments stop, and the value of the IO falls to zero. Interest equalization taxInterest equalization taxTax on foreign investment by residents of the US which was abolished in 1974. Further Suggestionsmortgage interest relief at sourceCompound interest Interest on interest Net interest cost (NIC) Covered Interest Rate Parity Party in interest interest rate Interest rate parity line (IRP) Mortgage interest deduction Interest Nominal interest rate Best interests of creditors test stepped interest debenture stocks Compound interest Interest rate futures contract Covered interest rate Covered interest parity Effective annual interest rate Interim interest reversionary interest Rate of interest Any interest date Stated annual interest rate True interest cost Real interest rate 
