Running yield
| Running yield |
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| See also |
Running yield tells investors what they will earn if they buy the bond and hold it for one year[1]. Running refers to a continuous investment, such as a bond held to maturity. Also known as current yield, interest yield or yieldt maturity (YTM) when used in reference to bonds[2]
Definition
Running yield is the method used quite often to express the profits of debt instruments in the short periods[3].
The current price of the bond is taken into account instead of its face value. Is the return of what an investor would expect if you purchased a bond and held it for a year, but the current profitability is not the actual profit which the investor receives, if the bond is to maturity[4].
Model
It is calculated by dividing the coupon payments (for bonds) or the income from dividends (for stocks) by the clean price of the debt instrument, expressed as a percentage[5]
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Assumptions
The purchased debt instrument is maintained for a certain period so that it can then be sold at the same price.
The coupon payments, defined as periodic payments, are included in the return on bonds, due to the fact that the rate of return refers to the price that has been paid for it. To calculate the running yield, use a clean price and not a dirty one[6].
Yield maturity (YTM)
Accounts for[7]:
- Income stream,
- Life of the bond,
- Face value at maturity.
We calculate it in order to compare the degree of attractiveness of investing in a particular bond with other investment opportunities. Often, it equates to an internal rate of return (IRR) of capital investment in bonds[8].
It is interpreted as a rate, which is obtained by investing in a bond investor had bought at a price of P (where P is the purchase price) and survived until the maturity obtained from reinvesting the interest at the rate of return[9].
YTM of debt fund dose not remain constant as[10]:
- Portfolio changes actively
- Market scenario changes
Footnotes
- ↑ Bhat S.,2008, p.216
- ↑ CTI Reviews, 2016, p.
- ↑ Colin A., 2016, ch. 9.3
- ↑ Ranganatham M., Madhumathi R., 2006, p.119-120
- ↑ Jones P., Jensen R., 2016, p. 442
- ↑ CTI Reviews, 2016, ch.
- ↑ Wong Robert A., High R.,1993, p.77-78
- ↑ Mayo B. H., 2016, p.290
- ↑ Cebula R., Billy Y., 2008, p.
- ↑ Jones P., Jensen R., 2016, p. 443
References
- Bhat S.,(2008)Financial Management: Principles and Practice Excel Books
- Cebula R., Billy Y., (2008)Yield to Maturity Is Always Received as Promised Journal of economics and finance education, 7, 1, Summer 2008
- Colin A., (2016)Mastering Attribution in Finance Pearson UK, Feb 1, 2016
- CTI Reviews, (2016) Introduction to Finance: Business, Finance CTI Reviews
- Jones P., Jensen R., (2016) Investments Binder Ready Version: Analysis and Management John Wiley & Sons, Mar 7, 2016
- Lichtenfeld M., (2015)Rich with Dividends: A Proven System for Earning Double-Digit Returns John Wiley & Sons, Feb 24, 2015
- Mauris H.,(2014) Inside the Crystal Ball: How to Make and Use Forecasts John Wiley & Sons, Dec 31, 2014
- Mayo B. H., (2016) Basic Finance: An Introduction to Financial Institutions, Investments and Management Cengage Learning, Mar 25, 2011
- Ranganatham M., Madhumathi R., (2006) Investment analysis and portfolio management Pearson Education/Dorling Kindersley,
- Wong Robert A., High r.,(1993)Fixed-Income Arbitrage: Analytical Techniques and Strategies John Wiley & Sons, Aug 26, 1993
Author: Agnieszka Katarzyna Sikora
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