What is the yield to the average?

Companies that want to obtain capital can decide to sell bonds. The sinking of funds is bond funds designed to regularly purchase or retire part of the outstanding bonds throughout the life of the problem. Thus, the proceeds of bonds in the sunken fund will not be equal to the revenues of maturity, because some of the bonds will be retired in time. The yield to the average lifetime calculates the expected yield of the fund by means of an average number of years when the bond is excellent. By using the return to the average, the bond investor can more precisely predict its return on the investment of bonds with a diving fund. For example, imagine that the company issues bonds to receive $ 100,000 in the US (USD) with a nominal value of $ 100 and a five percent coupon that is due annually. The sunk fund is incorporated into bond conditions with a fixed timetable 20 percent per year at a nominal value in five years. Armed with these information, investorThe average for this investment is four percent per year with an average life of three years. Redemption to the average life does not reach the yield to maturity as a result of 20 % of early retirement every year.

To make a calculation for yield to the average, the investor first multiplies the percentage redeemed each year by paying and the number of years invested. At the end of each year, the company will buy 20 percent of bonds for $ 105 ($ 100 main interest + 5 USD). According to the formula, the percentage of the payment of x redemption x years, the values ​​obtained for each year are 21, 42, 63, 84 and 105 a total of 315. This total amount is divided (21 x five years), or 105, for the average duration of three years. At a coupon rate of five percent for three years, with regard to a 20 % reduction in principle per year, the total return to the average is 12 percent or four percent per year.

return to maturity is the most common form of calculation of earnings. MainlyThe disadvantage of the revenue formula to maturity is that it assumes that the director will be invested at the same interest rate as the payouts payable. In fact, it's rarely true. Although conventional binding is held for maturity, the actual yield may vary from revenue to maturity. The yield to the maturity, as well as the return to the average, is only an expected result that depends on interest rate fluctuations.