Gilts and bonds

1  2  3  4  5  6  7  8  9  10  11  12  13  14  15  16  17   

6. Nominal yield

The 'nominal yield' of a bond is the amount of income it generates per year as a percentage of its nominal value. Put another way, it's the interest rate on your loan.

You won't have any problem finding the nominal yield as it will either be in the name of the bond (e.g. Treasury, 7%, 2003), or it will be in the formal description of the security.

But why do some bonds pay better than others? There are a number of factors:

1. Issuer's credit-rating
   The credit ratings of Standard & Poor's, Moodys and Fitch have a strong influence on the cost of borrowing for governments and companies. The better their rating, the lower the rate of interest they will have to pay, and vice versa.
2. Duration of bond
   The longer the term of the bond, the higher the nominal yield. This is to reflect uncertainty and the risk of inflation eroding the nominal value of the bond.
3. Interest rates at the time the bond is issued
   Bond interest rates need to be at a premium to general interest rates to tempt investors out of deposit accounts into the more risky bond territory. The lower general interest rates are at the time of issue, the lower the bond rates can be.

During the life of the bond, these three factors will change, and the bond price will continually adjust to the new circumstances.

1. What are bonds? 2. Different types of issuer 3. Different types of bond 4. Bonds compared to shares 5. Bonds as tradeable instruments 6. Nominal yield 7. Calculation of current yield 8. Capital gains on gilts and bonds 9. Calculating the redemption yield 10. Factors which affect bond prices 11. Are bonds for you? 12. Selecting gilts and bonds 13. How to buy gilts and bonds 14. Unit trusts and bond funds 15. Keeping track of your bond investments 16. Tax 17. Conclusion

• First Steps in Bonds
• Beating the Dow with Bonds
• Pricing Convertible Bonds