Key Words - Part II
Notes
Total Return The relative change in the value of an
investment.
Annual Return The APY that would equal the same
growth of an investment.
Bond A promisary note of future value. The starting
principal gains simple interest to be paid back at some
later date.
Current Yield of a Bond The amount of interest it
pays each year divided by the bond’s current price.
Examples will be done today.
M 1030 §4C
(Math 1030)
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Total and Annual Return
Notes
The total return of an investment equals the relative
change of the value for that investment. If P is the
starting principal and A is the cummulative value,
(A − P)
.
P
total return =
The annual return of an investment is the annual
percentage yield that would give the same overall growth.
If the investment period is Y years,
(1/Y )
A
annual return =
− 1.
P
M 1030 §4C
(Math 1030)
2/6
Example - Total and Annual Return
Notes
An investment of $3000 in a mutual fund grows to a value
of $8400 over 4 years. What are the total and annual
returns for the 4-year period?
total return =
($8400 − $3000)
= 1.8 = 180%
$3000
and
annual return =
=
(Math 1030)
√
4
$8400
$3000
(1/4)
−1
2.8 − 1 = 0.294 = 2.94%
M 1030 §4C
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Example - Total and Annual Return
Notes
You invest $2000 in shares of a startup, and it sells for
$1100 3 years later. What are the total and annual
returns for the 3-year period?
Ans: (a) -45%
(b) -18%
(Math 1030)
M 1030 §4C
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Current Yield of a Bond
Notes
Bonds promise future values.
Face value - The price of the bond at time of issue.
Coupon rate - A simple interest rate for the bond.
Maturity date - The date the face value is paid.
Rates change over time, and because of the competing
rates, sometimes bonds may be sold at a discount (less
than the face value). The return of the bond each year is
the ratio of the amount earned to the amount paid.
current yield =
(Math 1030)
annual interest paid
current price of the bond
M 1030 §4C
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Example - Bonds
Notes
Prices of bonds are quoted in points, or percentages of
the face value.
The closing price of a treasury bond with a face value of
$1000 is quoted as 105.97 points, for a current yield of
3.7%. If this is purchased, how much annual interest will
be earned?
Ans: $39.21. Note we did not know the original price, but
instead used the information to find the current price.
(Math 1030)
M 1030 §4C
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