ADMS 3531 Chapter 11 Study Sheet.docx

ADMS 3531 Chapter 11 Study Sheet.docx - ADMS 3531 Chapter...

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ADMS 3531 Chapter 11 Study Sheet The Yield to maturity (YTM) of a bond is the discount rate that equates the today’s bond price with the present value of the future cash flows of the bond Premium bonds : price > par value YTM < coupon rate Discount bonds : price < par value YTM > coupon rate Par bonds : price = par value YTM = coupon rate In general, when the coupon rate and YTM are held constant: for premium bonds : the longer the term to maturity, the greater the premium over par value. for discount bonds : the longer the term to maturity, the greater the discount from par value. Relationships among Yield Measures for premium bonds : coupon rate > current yield > YTM for discount bonds : coupon rate < current yield < YTM for par value bonds : coupon rate = current yield = YTM Note: If you buy a bond between coupon dates, you will receive the next coupon payment (and might have to pay taxes on it). However, when you buy the bond between coupon payments, you must compensate the seller for any accrued interest .
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