Module 44.1: Bond Valuation and Yield to Maturity Flashcards
What is a bond’s yield to maturity?
the market discount rate appropriate for discounting a bond’s cash flows.
If we know a bond’s yield to maturity we can calculate its value, if we know its value (market price) we can calculate its yield-to-maturity.
What is the formula to determine value of a zero coupon bond?
principal divided by the discount rate to the nth power (3 years = 3rd power)
What will an increase (decrease) in a bonds YTM do to the price?
it will decrease (increase) the price
if a bond’s coupon rate is higher than YTM, what does it mean for the price? will it be at a premium or discount?
if coupon is higher than YTM, it is trading at a premium to par value.
Is the percentage change in price the same as percentage change in YTM?
no, the price-yield relationship is convex.
Are bonds with lower coupon rates and longer maturities more sensitive to change in yield?
Yes.
