How to calculate bond yield when interest is paid yearly?

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When the interest is paid out yearly – you need to use a formula called Yield To Maturity (YTM) and calculate the bond's yield. There is a nice little calculator present on this site that you can use to see how this works out. Use Series 1 and 3 and you will get a table such as the one below.

Investment Amount	Tax Slab	Effective Purchase Price	Series 1 Yield (YTM)	Series 3 Yield (YTM)
5,000	30.9%	3,455	13.89	17.19
5,000	20.6%	3,970	11.57	13.41
5,000	10.30%	4,485	9.64	10.23
Buyback Amount	———–	——-	5,000	5,000
Time in years	———–	——-	10	5
Coupon Rate			8.00%	7.50%

If you input 3,455 in Current Market Price, 5,000 in Par Value, 8.00% in coupon rate, and 10 years – you will get your yield.

This formula assumes that whatever interest payments you received were re-invested at the coupon rate, and then takes the market value of the bond to calculate your yield.

In our example, this formula will say that you invested Rs. 3,455 initially, then get Rs. 400 at the end of every year which you will continue to re-invest at 8% and reap the benefit of compounding. Now this is an assumption so if you don't actually end up investing your interest payment every year your yield will be reduced.

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