Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Daily Factor

What it is:

Daily factor is the amount of yield earned in a day.

How it works (Example):

Recall that yield is the percentage interest an investor would earn if he or she purchased a given bond at its current market price. The formula is:

Coupon Interest Payment/ Market Price of Bond = Current Yield

Let's assume an XYZ Company bond is selling for $750 today in the market. The bond has a 10% annual coupon rate. The bond's current yield is:

($1,000 x 10%)/ $750 = 13.333%

To calculate the daily factor, simply divide this rate by 365 days:

Daily Rate = 0.13333/365 = 0.000365 or .0365% per day

Why it Matters:

Daily factors are important to retirees or other income-oriented investors who are focused on current cash flow from their portfolios. They help investors calculate how much interest they’ll earn in a day, and similarly, in a week, month, or other time frame. And although a daily factor may seem like a miniscule number, it can generate tremendous income when applied to large account balances.

Note, however, that yields change when market prices change. In other words, the daily factor and its associated annual yield represent the actual rate of return an investor will earn on a bond purchased today, rather than the rate of return intended by the issuer.

It is also important to note that the daily factor excludes a key source of returns: the capital gains (or losses) the investor may realize when he or she holds the bond until it matures. It also ignores the time value of money.