Yield to maturity and coupon rate?
I know the yield to maturity is the yield if holding bond to maturity. Is yield to maturity of the bond actually the reflection of the market rate at the issuing day(yield to maturity=market rate)? And how could the issuer determine the coupon rate of bond? Is it based on the risk free rate plus the risk premium? I just cannot very clearify the difference and usage of the yield of bond and coupon rate of bond. Please give me some help…thanks a lot……
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3 responses so far ↓
1 financegal27 // Apr 15, 2008
What is the amount of money you will receive? Look at the annual cash flow you receive as a % of the par value. As far as how its determined, it is based on the risk free rate, plus the risk premium. There are some other factors that are considered by the bond underwriters as well (sinking fund, call provision, etc..). Another way to figure it out is to use a simple time value of money. Its a little basic, but you would the I/Y formula. On a financial calculator that would be:
PV=Current value
FV=par
PMT=coupon payment received annually (it shouldn't change)
n=number of years coupon is paid
Compute I/Y
2 BillyBiggs // Apr 15, 2008
You are thinking to much about the coupon rate.
If you purchase a bond today it will have a set coupon rate. This number stays the same throughout the liffe of the bond.
You purchase a 1000 bond today with a 6% coupon rate each year $60 will be earned. Lets say its the 3rd year. Coupon rate is still 6% and $60 is earned. the present value of the bond at the 3rd year point would be $1180.
I had to look up the YTM I hated business finance
The yield to maturity is the discount rate which returns the market price of the bond. It is thus the internal rate of return of an investment in the bond made at the observed price. YTM can also be used to price a bond, where it is used as the required return on the bond.
Solve for YTM where
Market Price =
3 Bob // Apr 15, 2008
YTM is the coupon rate + or minus the difference between the price paid and the face value (paid as a lump sum at redemption time but averaged over the remaining life of the bond).
The issuer does not know the risk premium. He sets the rate at a price which will sell the bonds. When they're sold, he knows the risk premium.
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