A direct interest rate is a fixed annual return for an investor. It shows what an investor gets as a percentage per share. invested crown, which is placed in a bond. If an investor has chosen to buy a bond at price 80, then 6.25 will be earned if the interest rate is 5%. Does that sound weird? Fortunately you will get a good elaboration in this article.
Effective interest rate
It is important to make it clear that the direct interest rate does not help to give a proper picture of the total return or business that an investor has on a given bond. This is due to several things, but it is mainly due to the fact that it is an interest rate that does not take into account the withdrawals on the bonds such as an effective interest rate.
In addition, it must also be made clear that the direct interest rate also does not account for exchange rate gains on bonds.
How to calculate the direct interest rate?
In fact, it is not difficult to calculate the direct interest rate. It is done simply by means of a simple formula. If you would like to calculate the direct interest rate for one of your own investments, then the only formula you should use is: face rate * 100 / exchange rate .
It also means that the direct interest rate will be affected by the nominal interest rate and the rate of the given bond. If there is a high nominal interest rate, then the direct interest rate will also increase. On the other hand, if the interest rate is low, the direct interest rate will also be lower. There is a direct connection.
Furthermore, of course, the price of the bond is also something that has an impact. If the rate is high, then the direct interest rate will be low. It can for example. This happens in connection with a fall in interest rates in Denmark, which may affect the value of the bond. In contrast, a low interest rate on the bond will result in higher direct interest rates.
Get an example of calculating the direct interest rate
If you would like to see a more concrete example of how you can calculate the direct interest rate, then just follow below. However, as previously stated, it is not particularly difficult, since you do not do anything other than to fill in the above formula – it is something that most people can easily master themselves.
If we assume the same example mentioned at the beginning of this article, then you have purchased a bond at rate 80 which gives 5% interest, then the direct interest rate will be calculated as follows: 5% * 100 / 80 = 6.25% . It is a very simple calculator that you can easily enter into your calculator.
This also means that if you have chosen to buy a bond at a price of 80, you as an investor will have an annual interest rate of 6.25%, if the nominal interest rate is 5%. Therefore, it is not difficult to find out what the direct interest rate actually is on a bond. You can expect that in just a few minutes.
Is it necessary to calculate the direct interest rate when buying a bond?
It is not directly necessary for you to calculate the direct interest rate if you have purchased either one or more bonds. However, it is not something that changes that it is a good idea to do. This is especially important because it is not particularly difficult. As mentioned above, this can be done in a very short time.
Furthermore, it is also a very simple calculation that everyone can find out.