- Did you know: A bond’s coupon is not the same as yield
- Use MS-Excel's yield function to understand the bond market
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Did you know: A bond’s coupon is not the same as yield
A single discount rate applies to all as-yet-unearned interest payments. It works the other way, too. Say prevailing rates fall from 2 percent to 1. Again, the 2-percent coupon falls to a 1. Conversely, yield to maturity will be higher than the coupon rate when the bond is purchased at a discount. The Balance uses cookies to provide you with a great user experience. By using The Balance, you accept our.
Bond Investing Basics. By Thomas Kenny. Continue Reading. Considered a more accurate estimate of a bond's profitability than other yield calculations, the yield to maturity of a bond incorporates the gain or loss created by the difference between the bond's purchase price and its par value.
Use MS-Excel's yield function to understand the bond market
The coupon rate is often different from the yield. A bond's yield is more accurately thought of as the effective rate of return based on the actual market value of the bond. At face value, the coupon rate and yield equal each other.
If you sell your IBM Corp. Because coupon payments are not the only source of bond profits, the yield to maturity calculation incorporates the potential gains or losses generated by variations in market price. If an investor purchases a bond for its par value, the yield to maturity is equal to the coupon rate. If the investor purchases the bond at a discount, its yield to maturity is always higher than its coupon rate.
Yield to maturity approximates the average return of the bond over its remaining term. A single discount rate is applied to all future interest payments to create a present value roughly equivalent to the price of the bond. The entire calculation takes into account the coupon rate; current price of the bond; difference between price and face value; and time until maturity. Along with the spot rate , yield to maturity is one of the most important figures in bond valuation.
If a bond is purchased at par , its yield to maturity is thus equal to its coupon rate, because the initial investment is offset entirely by repayment of the bond at maturity, leaving only the fixed coupon payments as profit. If a bond is purchased at a discount, then the yield to maturity is always higher than the coupon rate.
If it is purchased at a premium , the yield to maturity is always lower. Fixed Income Essentials. Investopedia uses cookies to provide you with a great user experience. By using Investopedia, you accept our. Your Money. Personal Finance. Your Practice. Popular Courses.
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