2.6 Types of Yields Flashcards
What is the nominal yield of the bond?
It is the percentage of the par value received annually as an interest payment for the loan.
What is another name for nominal yield?
Another name is interest rate or coupon rate irrespective of it being a bearer, registered or book-entry bond.
How frequent are bond payments?
Typically, two installments in a year.
What are the coupon payments on an 8% book-entry bond? Explain.
$40.
Typical par value = $1000, therefore, 0.08*$1000 = $80 and as the installments typically are twice in a year, it will be $40 for each payment.
Does the market interest rates affect the nominal yield?
No. No matter how dramatically the market interest rates fluctuate, the nominal yield on the bond will be what is printed on the bond certificate.
What is a discount bond?
A bond that sells at below par value. For example, If the nominal yield on your bond is 8% and the market interest rate is 10% then no one will buy your bond at 8% therefore you will have to issue a bond at below its par value to entice the customers i.e. below $1000.
Why would a customer purchase a discount bond with low nominal yield?
1) It is less costly to purchase
2) It will pay the par/face value i.e. $1000 at maturity which is greater than the price they purchased it for.
What is a premium bond?
It is a bond sold above its par value.
What is the current yield?
It is the return on investment. It is basically an approximation of the annual return on the bond.
Current yield = Coupon payment/current market price of the bond.
What is the current yield of a 6% bond purchased at discount for $960?
Coupon rate = 6% Par value = $1000 current market price = $960 current yield = coupon payment/current market price of the bond Coupon payment = 0.06*1000 = $60 current yield = 60/960 6.25%
What is yield to maturity(YTM)?
It is the anticipated yield on a bond which is held to maturity. It is essentially the return over the life of the bond.
How does YTM differs from current yield?
It takes into account the coupon rate, the price and the maturity.
For non-callable bonds, the YTM = __ of the bond
Internal rate of return
What does an inverse relationship between the price of the bond and YTM means?
It means when one falls the other rises.
What is yield to call?
It is the anticipated yield till the first call date of the bond.
