What it is:
How it works/Example:
Interest Payment/ Market Price of Bond =
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 prices change. In other words, the daily factor and its associated annual represent the actual rate of return an investor will earn on a 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.