Calculating the GRY of a bond is really easy! At first glance of the formula, it may appear difficult. Especially when you need to remember it!
We are basically finding out the following:
Total income up until maturity
The cost of the bond/gilt
Using this information together with the maturity date, we are able to calculate the approximate yield against the current cost from this bond, before we decide to purchase.
The Formula
In a few texts the formula is over complicated, where you are expected to calculate the running yield first. We don't have to:
Example
UK Treasury Stock 7% 2021
Can be bought at 102.2 as @ Jan 2013
What do we know about this?
Coupon = 7% or 0.07
Maturity Date = 2021 (so years to maturity from 2013 is 8 years)
Par Value = typically 100 in the UK or 1000 in the US
Market Price = 102.2
Using the formula above we can calculate the GRY, remember to calculate the brackets first:
Excellent post
ReplyDeletethank you very much healpful :)
ReplyDeletevery helpful
ReplyDeletethanks for this, appreciated
ReplyDeleteAwesome and simple Explanation.
ReplyDeleteThank you this is so clear and concise.
ReplyDeleteThank you! Finally understood it.
ReplyDelete