What is the return on bonds?

The return generally represents the profit divided by the capital employed. In the case of bonds, the return is the total return after the end of the term divided by the capital paid in for the bond purchase. The average annual return is simply the total return divided by the term in years. Anyone who purchases PCC bonds at par value, free of charge, directly from PCC SE achieves an annual return equal to the bond interest rate.

If bonds are bought or sold on the stock exchange during the term, the calculation of the bond yield includes not only the interest income but also the capital gains or losses on the sale or maturity of the bond.

In addition, an investor can generally reinvest the interest income paid out during the term, which leads to a compounding effect. Without taking this effect into account, which depends on the individual investment strategy of each investor, and without taking additional transaction costs into account, the return is calculated as follows:

Return for the entire term = (Interest + Nominal value – Purchase price) / Purchase price

An example: You invest 6,000 euros in bonds with a term of 5 years and a coupon, i.e. annual interest rate, of 5.50%. Let’s assume that you purchase the bond at the issue price of 100% and hold it until final maturity. Then the return is:

Return for the entire term = ((€1,650 + €6,000) – €6,000) / €6,000 = 27.5%

In this case, the total return corresponds exactly to the coupon multiplied by the term in years. This return is achieved by investors who purchase PCC bonds directly from PCC SE and hold them for the entire term.

If, on the other hand, you purchase the bond on the stock exchange after one year, for example, at a price of 102 euros, the total return is:

Return for the remaining term of four years = ((4*0.055*€6,000 + €6,000) – 1.02*€6,000) / 1.02*€6,000 = 19.6%

The average annual return is therefore around 4.9%, which is slightly below the coupon due to the higher purchase price.