Historical Examples
Currently bond yields are fairly low. In part I the best investment we found only had an expected yield of less than 4%
a year. So right now investing in the bond market for income isn't going to
yield any great investment returns (ignoring possible changes to bond prices).
The above chart shows the net yield for the FTSE All Share
Gilt (UK government bonds) fund for the last 5 years. As you can see at present
the yields are pretty low historically. 5%+ yields have been possible in mid
2007 and again in mid 2008.
Below is the net yield chart for the UK corporate bond fund:
As you can see very healthy returns were achievable in
2008-2009. Let's say that you decided to invest in this bond when the expected
return went above 8% in October 2008, deciding to sell the investment if the
expected yield dropped below 5% (assuming at less than 5% expected return you
could find more profitable investment situations). How would your investment
have faired? On the 3rd
of October 2008 the expected yield went above 8% using our valuation method. On
that day you could buy the bond for 110.46. The bond's expected net return dropped
below 5% on the 24th of March 2010 with a valuation of 117.52. This gives the
following for this investment:
Action
|
Date
|
Value
|
Purchase bond
fund
|
3/10/2008
|
-110.46
|
Distribution
|
17/11/2008
|
1.82
|
Distribution
|
16/2/2009
|
1.91
|
Distribution
|
18/5/2009
|
1.84
|
Distribution
|
17/8/2009
|
1.78
|
Distribution
|
16/11/2009
|
1.69
|
Distribution
|
15/2/2010
|
1.66
|
Fund sold
|
24/3/2010
|
117.52
|
The above example gives a total return of 16.1% profit in
under 18 months or an IRR (internal rate of return) of 10.9% annually. Not a bad
investment overall especially considering the market conditions at the time and
above our expected return of 8% annually.
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