21.6 Lessons learnt

  • Bonds donu2019t pay out dividends, but you are entitled to receive interest payments. These payments are called coupons. The coupon gets paid on the coupon date, which again impacts the eventual yield.
  • When investing in bonds, it is crucial to realize that there is a difference between coupon yield, often expressed in the denomination of the bond, and the effective yield, which considers the redemption profit and loss towards maturity.
  • The formula to calculate the effective yield on your bonds is:

1. Coupon yield = Interest percentage (nominal value)

2. Calculate redemption profit/lossu00a0

3. Determine the average purchase price of the bond

4. Calculate the actual coupon

5. Calculate the effective yield = actual coupon divided by the average purchase price * 100