I’ve bought a bond and I’m not sure how to calculate returns. Is there a simple formula or method?
It’s not too complex. You just need the coupon rate, face value, and the price you bought it at.
It’s more about the yield. Price plays a big part in that. If you buy at a discount, your returns will be higher than the coupon rate.
Yeah, just looking at coupon rate isn’t enough. Yield to maturity (YTM) is the better measure if you want a real sense of return.
Wait, what’s YTM? Is that different from the coupon rate?
YTM is the total return you’ll get if you hold the bond until maturity, accounting for the price you paid, the coupon payments, and the face value at maturity. It’s more accurate than just the coupon.
Yeah, so if you buy at a premium, YTM will be lower than the coupon rate. If you buy at a discount, YTM will be higher.
Okay, so it’s not just about multiplying face value and coupon, it’s more complicated than that.
Exactly, and don’t forget to factor in if you’re reinvesting the coupons. That can change the total return.
Yeah, it gets easier once you get the hang of it. Just don’t overthink it. It’s all about the price you pay.