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This question already has an answer here:

Say I want to buy a bond that matures in 10 years, and that pays out 5% of once a year, so it has 10 payouts remaining. Say the value is 100$. Say the bond is being sold for 140$ today. I would be paid a total of 150$ (10x 5% + the 100), and put in 140$. This means that over the course of 10 years I make 10$ on an investment of 140$, which equates an annual rate of 0.69%. This is clearly terrible. Yet most of the actual bonds I can buy at my broker lead to these kinds of figures. Why would anyone buy these products given the extremely bad returns?

marked as duplicate by Acccumulation, Nathan L, Rupert Morrish, Dheer, Pete B. Jan 9 at 11:29

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    Have you see the recent stock market swings? -3% in a day. Some people prefer positive returns to be guaranteed, at least for a portion of their portfolio. – Peter K. Jan 5 at 23:29
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    The 10 year US Treasury Note is paying around 2.7% and the 10 year triple A corporate rate is about 1% higher. At a rate of .69%, perhaps you need a new broker? – Bob Baerker Jan 6 at 0:04
  • @BobBaerker The point is that there is a difference between the coupoon percentage, and the effective return on your investment. – user2520938 Jan 6 at 10:21
  • Tell us how much of a difference there is b/t the coupon percentage and the effective return on the investment. Will these broker recommended bonds be competitive with a 2.7% Treasury Note or a 3.7% corporate bond yield? – Bob Baerker Jan 6 at 12:51
  • You might be interested in Why would anyone buy a government bond? Full disclosure: The accepted answer is my own. – a CVn Jan 6 at 17:08
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You cannot add together payments made at different times. The actual interest rate implied by the transaction you describe:

  • pay out $140;
  • receive 10 annual payments of $5, first payment a year in the future;
  • receive a "balloon" payment of $100 at the time of the 10th annual payment;

is 0.818% compounded annually. (Find a mortgage calculator that includes a balloon payment at the end of the term)

That said, the reason the bond is priced at $140 is that other purchasers believe that a 0.818% return on their investment, bad as it appears, is a good deal at the moment, given the stability and history of the bond issuer, and interest rates available from similar investments (savings accounts, CDs, money market funds...)

  • Thanks for your answer. So besides the fact that I had to convert to PDV, the number I got was in the right ballpark. – user2520938 Jan 6 at 10:22
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    The last sentence is actually the grid. It does not MATTER what the OP thinks of the investment - the price is there because enough actors believe that it should be there to bid it up there. Market price is not an idea of the broker, is is the result of open outcry. – TomTom Jan 8 at 8:07
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Here is a current Treasury Bond example:

Redemption date, 2/15/2029

Coupon, 5.25%

Current yield, 2.678%

Bond price, 122.625

If I were to calculate the bond price nominally, that would be 5.25/.02678 = 196.04 . So additional bond pricing is necessary to allow for approaching redemption. That's approximately ((5.25 - 2.678) * 10 years) + 100 = 125.70.

I couldn't use the given example but the obvious answer to the question is to buy a bond when it is correctly priced.

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