The Bridgeport times and evening farmer., 1920-08-10
Financial Notes

The "yield'' of a bond is probably one of the features to which the ave rage investor gives the closest at tention, yet it seems likely that a great many have at best only very indefinite idea of exactly what the term means.
 The net returns on stocks on ''per- petua1 loans' such as British Consols persents no difficulties of computa- tion, being simply the dividend or in terest rate divided by the price. In the case of an ordinary bond, unless bought at par, determination of the yield involves considerable computa- tion.
 The theory involved in determining the yield of bonds is, however, not difficult to understand. A bond has two main portions, the interest, paya- ble usually in semi-annual install ments, and the principal, payable in a lump sum at the expiration of the loan. Obviously if the purchaser of the bond will receive at maturity more or less than the amount he paid for the bond, the net yield to him cannot be determined simply by dividing the interest rate by the amount paid as is done in the case of stocks. The error in such a me i thod can readily be seen by consid- ering for instance, the case of pur- chasing at no per cent. bond, payable in ten years at par. Dividing the price into the coupon rate shows an apparent annual return of 6 4 2 per cent on the investment. If the purchaser of a s1,oo0 bond consumed ; the entire S70 yearly interest he would, however, at the end of 10 years when the company paid him i s1,oo0 on the bond for which he 1 paid S1,10o find that he had used for living expenses $1oo of his principal.
 In other words a portion of the $70 received each year must ',e set aside | to accumulate a fund to make up the i s100 premium that he paid for the : bond and the real yield to him of i the investment is correspon dingfy less /. than Al per cent. The sums which i he must deduct from his coupon in !. come is that sum which, with com- 1 pound interest on the various in | stalnents, will at the end of ten l years total $100. This compound in
 terest factor makes this annual sum less than the result obtained by di-
 uiding the premium by the number of years over which it is spread.
 The opposite case occurs if the in ! vestor purchases a 4 per cent bond 1 at 75, due in 20 years The invest ment will net him $40 cash each l year per s1OOO bond and in addition he will get at maturity $25o more 1 than he paid for his bond. He could i, then, each year in addition to con-
 surning his $50 income borrow and consume a further sum such that ir 20 years the total of these borrowed
 sums plus compound interest accrued
 on them would equal $25O. When his
 bond was paid by the borrowing GOT, porauion he could then repay the S25O, and still have left his origina
 capital of $750. The actual yield or
 the investments is thus in the case o.
 bonds purchased below par greater
 than the return indicated by dividins
 the coupon rate by the purchast price.
 A point in connection with deter
 imitation of yields that has caused much discussion is the question 0 the proper interest rate to use il
 compromising the various small sum
 involved. The practice is, however
 firmly established of computing bon, yield on the assumption that dnteres
 can be compounded on small incre 1 ments at the same rate as the invest T ment as | whole yields.
 The actual calculation of yield in