### InvestorGeeks.com on Bonds

This week Chris posted a nice article on bonds on InvestorGeeks. In my opinion, no investor should exclude bonds from his portfolio, because they are a secure way to create a regular income stream. Well, actually it isn't completely safe, as the Argentinian bonds showed in the past. But since rating agencies like Standard & Poor's publish bond ratings the risk can be seen as easily comprehensible compared to stocks - as long as you stay informed.

Chris mentions the yield to maturity formula to calculate a bond's actual rate of return. This formula gives you the exact rate of return but is very complicated. A less complicated formula is:

r = (c*B + (B-P)/n) / P

c = coupon rate

B = par value

P = purchase price

n = years to maturity

c = 6%

B = $1000

P = $980

n = 8 years

Simple formula: r = 0.0638 =

Exact YTM: r = 0.0633 =

You see: There is a little difference, but you get a first impression on the bond's rate of return.

Links:

Moneychimp: YTM

Fool.com: Investing basics: Bonds

Chris mentions the yield to maturity formula to calculate a bond's actual rate of return. This formula gives you the exact rate of return but is very complicated. A less complicated formula is:

r = (c*B + (B-P)/n) / P

*with*c = coupon rate

B = par value

P = purchase price

n = years to maturity

**Note:**This formula is less exact than the YTM formula, but it gives you a basic idea on the bond's rate of return. The actual YTM is below the above formula's result. Let's compare them with an example:c = 6%

B = $1000

P = $980

n = 8 years

Simple formula: r = 0.0638 =

**6.38%**Exact YTM: r = 0.0633 =

**6.33%**You see: There is a little difference, but you get a first impression on the bond's rate of return.

Links:

Moneychimp: YTM

Fool.com: Investing basics: Bonds

## 2 Comments:

this post is really helpfull...thanks!

By khairul(bebas-hutang), at 6:30 PM

Excellent tips

By PENNY STOCK INVESTMENTS, at 7:55 AM

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