What Is Return on Debt?

Bond yield is the ratio between the total annual yield of investment in bonds and the total investment principal. There are three main factors that determine bond yields: interest rates, maturities, and purchase prices. Changes between these three factors determine the level of bond yields. Generally speaking, there are three types of income that bonds bring to investors: Interest income calculated based on the fixed interest rate of bonds. The difference between the subscription price and the repayment price (par value). The income from reinvestment of interest and profit and loss. Calculate the yield according to these three different incomes, which can be divided into direct yield, final interest rate of simple interest and final yield of compound interest. Direct rate of return is the ratio of annual interest income to investment principal calculated at a predetermined interest rate. ^[1]

Bond yield

Bond yield is the ratio between the total annual yield of investment in bonds and the total investment principal. There are three main factors that determine bond yields: interest rates, maturities, and purchase prices. Changes between these three factors determine the level of bond yields. Generally speaking, there are three types of income that bonds bring to investors: Interest income calculated based on the fixed interest rate of bonds. The difference between the subscription price and the repayment price (par value). The income from reinvestment of interest and profit and loss. Calculate the yield according to these three different incomes, which can be divided into direct yield, final interest rate of simple interest and final yield of compound interest. Direct rate of return is the ratio of annual interest income to investment principal calculated at a predetermined interest rate. ^[1]

There are three types of bond yields: (1) current yield; (2) yield to maturity; (3) early redemption yield.

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Bond yield (bond yield): It is a commonly used indicator for measuring bond investment income. It is the ratio of bond yield to the principal invested. It is usually expressed as an annual interest rate. Bond investment income is different from bond interest. Bond interest refers only to the product of the coupon rate of the bond and the face value of the bond. It is only a component of the bond investment income. In addition to bond interest, bond investment income also includes spreads and interest income from interest reinvestment, where the spread may be negative. Bond yield curve is a curve describing the quantitative relationship between the yield of a group of tradable bonds and their remaining maturity at a certain point in time. Returns are plotted on the ordinate.

The main factors that determine the bond yield are the coupon rate, maturity, face value, holding time, purchase price and sale price of the bond.

Bond yield base rate

The basic interest rate is the minimum interest rate required by investors. Generally, the risk-free government bond yield is used as a representative of the basic interest rate, and the corresponding basic interest rate benchmark should be selected for bonds with different maturities.

Bond yield risk

The interest rate differential between the bond yield and the base rate reflects the additional risk investors face when investing in non-treasury bonds and is therefore also known as the risk premium. Factors that may affect the risk premium include:

1. Issuer type. Different types of issuers represent different risks and returns, and they fulfill their contractual obligations with different capabilities. For example, there is a certain spread between the bonds issued by different issuers, such as industrial companies, public utility companies, financial institutions, and foreign companies, and the base interest rate. This spread is sometimes referred to as intra-market spread.

2. Issuer's creditworthiness. Bond issuers' own default risk is an important factor affecting bond yields. The lower the creditworthiness of the bond issuer, the higher the yield required by the investor; otherwise it is lower.

3 Other terms such as early redemption. If the terms of the bond issuance include provisions that are beneficial to the bond issuer, such as early redemption, investors will require higher spreads compared to similar government bonds; otherwise, if the terms are beneficial to bond investors, investors may require A small spread.

4 Tax burden. The tax position of bond investors will also affect their after-tax yields.

5. The expected liquidity of the bond. Bond transactions have different levels of liquidity. The greater the liquidity, the lower the yield required by investors; otherwise, the higher the required yield.

6. Expiry period. Because the volatility of bond prices is related to the length of their maturities. Therefore, the longer the bond maturity, the greater its volatility and the corresponding yield. vice versa