Current yield is greater than coupon rate

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  1. Bond Yield
  2. What it is:
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  4. What’s the Difference Between Premium Bonds and Discount Bonds?

Where c is the annual coupon rate, F is the face value of the bond and P is its current market price. Current yield of a bond that trades below its face value is higher than its nominal yield i. The most useful and theoretically-sound measure of bond yield is the yield to maturity of the bond.

Bond Yield

There are other measures such as current yield, but they are less comprehensive. The yield to maturity is the rate of return that a bondholder expects to earn if he purchases the bond at its current price P 0 and holds its till maturity and receives all associated future coupon payments and the maturity value. It is effectively the internal rate of return of the bond.

Where P 0 is the current bond price, c is the annual coupon rate, m is the number of coupon payments per year, YTM is the yield to maturity, n is the number of years the bond has till maturity and F is the face value of the bond. The above equation must be solved through hit-and-trial method, i. Yield to maturity has the same weakness as that of the internal rate of return.

It assumes that the coupon payments are reinvested at the yield to maturity. It understates the reinvestment risk. The bond had a maturity of 10 years when issued. As at 1 Jan , the bond has 8 years till maturity, its coupon rate is 3.

What does Coupon Rate mean?

Because the bond is trading at price above its face value, so the yield must be lower than the coupon rate. This kind of representation of yield shows what you will earn by holding a bond.

Once a bond is listed on an exchange, it carries a market price, which is essentially determined by demand and supply. The market yield of the bond is linked to this price.

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This is also referred to as the current yield, which is calculated by dividing the coupon rate with the market price of the bond and multiplying with the face value. Bond yield and prices have an inverse relationship—when prices rise, yields fall and vice-versa.

What it is:

This happens because at a higher market price, you get the same coupon. So if you missed out on the opportunity to subscribe to a public issue of debentures that you wanted, look for a listed security.

Define Yield to Maturity

If you want to hold till maturity, it works well for you that the bond is trading at a discount—bond price is less than the face value and yield is higher than the coupon rate. Traders will evaluate other market conditions and may buy bonds both at a discount and premium.

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Viewed 4k times. Marcus Thornton. Marcus Thornton Marcus Thornton 2 2 silver badges 6 6 bronze badges. How could we know the yield after discount is large than current yield?

But what if it matures in two years? I cannot generalized to two years because the computation is more complicated and I cannot make sure YTM is larger than current yield.

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What’s the Difference Between Premium Bonds and Discount Bonds?

It seems that the key point is that no matter how long the maturity is, the discounted principal still will contribute to a positive yield. Sign up or log in Sign up using Google. Sign up using Facebook. Sign up using Email and Password.