FIN320- "Bond Prices and Yields"

Business & Finance
Tutor: None Selected Time limit: 1 Day

An example that the stated yield to maturity and realized compound yield to maturity of a default free zero coupon bond must always be equal.

Aug 2nd, 2015

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The investment return of a bond is the difference between what an investor pays for a bond and what is ultimately received over the term of the bond. The bond yield is the annualized return of the bond. Thus, bond yield will depend on the purchase price of the bond, its stated interest rate — which is equal to the annual payments by the issuer to the bondholder divided by the par value of the bond — plus the amount paid at maturity. Because the stated interest rate and par value are stipulated in the bond indenture, the price of the bond will vary inversely to prevailing interest rates. If interest rates rise, then the price of the bond must decrease to remain competitive with other investments and vice versa.


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Aug 2nd, 2015
Nominal yield, or the coupon rate, is the stated interest rate of the bond. This yield percentage is the percentage of par value—$5,000 for municipal bonds, and $1,000 for most other bonds—that is usually paid semiannually. Thus, a bond with a $1,000 par value that pays 5% interest pays $50 dollars per year in 2 semi-annual payments of $25. The return of a bond is the return/investment, or in the example just cited, $50/$1,000 = 5%.


Aug 2nd, 2015

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Aug 2nd, 2015
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