1. Quantitative Methods2. Measuring Portfolio Returns3. Analyzing Your Client's Financial Profile4. Special Issues for Retirement Plans5. Portfolio Risks

Any discussion of portfolio returns must also include the variety of ways that bond income may influence a portfolio's rate of return. While the stated (nominal) interest rate on a bond might appear to be the only measure of a bond yield, it is only accurate if you buy a bond at par and hold it until the bond matures. However, many investors buy a bond at a price above or below par, and many sell prior to maturity. The following measures are used to reflect these circumstances:

• Yield to maturity - This is the return based on the actual purchase price of the bond. It takes any premium or discount over par into account and uses the actual time to maturity for the number of compounding periods. If the bond was purchased at par, the yield to maturity will equal the stated coupon rate.
Â
• Yield to call - This is a similar calculation, but it uses the call date for the number of compounding periods and incorporates any call premium into the future value.
Â
• Current yield - This is simply the annual income divided by the market value of the bond. If the bond is trading at a premium, the current yield will be less than the nominal yield. If the bond is trading at a discount, the current yield will be greater than the nominal yield.
Â
• Real interest rate - The investor receives this rate after inflation is taken into account. In essence, the nominal interest rate = the real interest rate plus an inflation premium. The inflation premium is typically higher for bonds with longer maturities.

Exam Tips and Tricks
Consider this sample question:

The method of evaluating investment returns that calculates the interest rate which discounts cash inflows and outflows to a present value of zero is called:

2. internal rate of return.
3. total return.
4. net present value.

The correct answer is "b": "d" is incorrect because the method referred to incorporates the concept of net present value, but it is not a definition of that term.

Introduction

Related Articles
1. Investing

### How To Evaluate Bond Performance

Learn about how investors should evaluate bond performance. See how the maturity of a bond can impact its exposure to interest rate risk.
2. Investing

### Understanding the Different Types of Bond Yields

Any investor, private or institutional, should be aware of the diverse types and calculations of bond yields before an actual investment.

### Simple Math for Fixed-Coupon Corporate Bonds

A guide to help to understand the simple math behind fixed-coupon corporate bonds.
4. Investing

### Understanding Bond Prices and Yields

Understanding this relationship can help an investor in any market.
5. Investing

### Calculating Bond Equivalent Yield

The bond equivalent yield calculates the semi-annual, quarterly or monthly yield on a discount bond or note.
6. Investing

### Comparing Yield To Maturity And The Coupon Rate

Investors base investing decisions and strategies on yield to maturity more so than coupon rates.
7. Investing

### How Do I Calculate Yield To Maturity Of A Zero Coupon Bond?

Yield to maturity is a basic investing concept used by investors to compare bonds of different coupons and times until maturity.
8. Investing

### Interest Rates, Inflation and the Bond Market

Interest rates, bond prices and inflation all have an impact on one another.
9. Investing

### Understanding Interest Rates, Inflation And Bonds

Get to know the relationships that determine a bond's price and its payout.
1. ### I'm about to retire. If I pay off my mortgage with after-tax money I have saved, I can save 6.5%. Should I do this?

Only you and your financial advisor, family, accountant, etc. can answer the "should I?" question because there are many ...
2. ### My wife and I both converted our Traditional IRAs to Roth IRAs over a decade ago and have invested the maximum allowed each year since. We're buying our first home soon. Do we both qualify for one-time, tax-free, \$10,000 distributions?

You and your spouse each qualify for a penalty-free distribution of up to \$10,000 for the purchase, acquisition or construction ...
3. ### Is a Thrift Savings Plan (TSP) a qualified retirement plan?

Take advantage of the government's retirement plan for employees with the Thrift Savings Plan. As with a 401(k), contributions ...
4. ### Who manages the assets in a Roth 401(k) account?

Learn how to personally manage the assets in your Roth 401(k) plan and determine the best options available to help meet ...