In addition, bonds make coupon payments that are calculated using a simple interest formula. These payments may be made annually or semi-annually and are paid directly to the investor. Rather than making coupon payments to the investor, some bonds automatically reinvest the coupon into the bond, so they grow at a stated compound interest rate.
For longer bond maturity periods, this interest-on-interest significantly increases the bond's ultimate return and may be the only way to realize an annualized holding period return equal to the coupon rate. The calculation of reinvested interest depends on the reinvested interest rate. The interest-on-interest formula for reinvested coupon payments assumes the reinvested payments grow at an interest rate equal to the bond's stated YTM.
To calculate this total, raise 1 plus the YTM rate to the nth power, where "n" is the number of payment periods. Subtract 1 and divide by the YTM rate.
Instead of making coupon payments to the investor, some bonds reinvest the coupon into the bond, so it grows at a stated compound interest. Reinvested bond coupon payments can account for up to 80 percent of a bond's return to an investor. The exact figure depends on the interest rate earned by.
Multiply the result by the coupon payment amount and subtract the total amount of payments. Subtract 1 and divide by 0. If the reinvested interest rate is less than the YTM, you can still calculate the interest for each reinvested coupon payment and then tally the results. Agency Collateralized Mortgage Obligations.
Fixed Income Securities Frank J. Brealey , Stewart C. Fabozzi is on the board of directors of the Guardian Life family of funds and the BlackRock complex of funds. He earned a doctorate in economics from the City University of New York in and, in , received an honorary doctorate of humane letters from Nova Southeastern University. Features and Risks of Fixed Income Securities.
Tax Treatment. Financing and Risk Management Richard A. Obtaining Information on Bond Prices. Computing Bond Yields.
Global Investment Choices. Obtaining Information on Bond Prices. The exact figure depends on the interest rate earned by the reinvested payments and the amount of time until the bond matures. Many mutual funds allow investors, once enrolled, to re-invest earnings in partial shares if necessary. Globally, bonds account for nearly…. Re-investing the earnings from your bonds can be accomplished in several ways, including through a mutual fund that owns bonds, by building a bond ladder, or by simply buying new bonds with the income from those you already own.
Global Investment Choices. Historical RiskReturns.
Regional Exchanges and. Detailed Analysis of Exchange. Changes in the Securities Markets.
Uses of SecurityMarket Indexes. BondMarket Indicator Series. Comparison of Indexes over Time. Aggregate SecurityMarket Analysis. Individual Stock and Bond Analysis.
Obtaining Information on Bonds. Implications of Efficient Capital Markets.
Some Background Assumptions. Investing with Derivative Securities 3 The Relationship between Forward. An Introduction to the Use of Derivatives. Computation of Financial Ratios. Evaluating Operating Performance. Analysis of Growth Potential. The Quality of Financial Statements. Theory of Valuation.