This note was written by Frederico Rossi.
Speaking of bonds we often hear about naming it _But what is it and what does it represent? That's what we're gonna try to explain in this column.
The definition of _(Internal Return Rate) is the rate that equals the price of a bonus with the payments that performs this title updated to value.Basically is an indicator that informs about the profitability annual average within a bonusbeing a very useful measure to compare instruments Fixed income with different characteristics, coupons and deadlines.Let's not go into the detail of the calculation and the math behind TIR,because there are several websites and brokers that daily deliver this updated data.
However, for that _calculated when performing the investment It is essential that two conditions be met:
- Keep the bonus in the wallet until the due; and
- that the coupons paid for the bonus are reinverted to the same Internal Return Fee at the time of purchase.
This is because if you do not keep the bonus up to your maturity, your own selling price will impact on the calculation of the total return of the investment, and it may be different from the calculated initially.
With regard to the reinvestment of coupons, if they are invested in a lower rate, the final income of the investment will be lower than the estimated at the time of purchase (and vice versa).So if a bonus, for example Bonar 24 (AY24) at the time of buying has a 9% TIR, to get that return I must keep AY24 up to its maturity and reinvest the coupons that pays at the same rate (i.e. 9%). For this, we must invest these coupons on AY24, but at the same price we buy it to get that return.
Another thing to take into account is the difference between coupon rate and TIR. The coupon fee is the interest that the investor will receive periodically for having bought this bonus and is a fixed percentage established contractually expressed in the title issue leaflet. For example, the Bonar 24 coupon rate is 8.75% annually in semi-annual paid dollars.
Usually bonds are issued with a nominal value of $100 and at that time is when the coupon coincides with the return. Since debt securities start listed on the market, their price fluctuates and is here when the value of the TIR moves away from the coupon, since the price to which the investor buys the bonus will determine its final income.
However, that investor who cannot or does not want to meet the two conditions to finally get the return that stable TIR can calculate the expected income of its investment otherwise.
This form is called Current Yield (CY) and basically consists of the relationship between the bonus purchase price and the coupon rate of the bonus. It means that:
CY=Cupon/Precio
For example, I buy Bono Centenario (AC17) to USD 81.9 that pays a coupon of 7.125% annually, i.e. USD 7.125 per 100, so my annual income or Current Yield is 8.69% (7.125/81.9x100).
Therefore, investment to USD 81.9 my annual income is 8.69%, a higher rate than that of the issue leaflet coupon, but which does not take into account the reinvestment of annual payments or the bonus amortization quota.Undoubtedly, it is a simpler way to calculate the return of investment. On the other hand, its final investment income will depend on the sale price and the date on which it sold, taking into account the amount of annual interest payments it received.
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