CH 7 - Yield to maturity(YTM = APR for a bond Example YTM =...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Yield to maturity (YTM) = APR for a bond Example: YTM = 8% semi annual 8%/2 = 4% “r” or “I/Y” Coupon yield – annual coupons / par value Current yield – annual coupons / price Effective annual yield – Effective Annual Rate (EAR) STUDY HOURS: Sat 10-12 Tuesday 12-2 next Wednesday 10-12 Bond Valuation Bond Value = PV of coupons + PV of par Bond Value – PV of annuity + PV of lump sum As interest rates increase present values decrease So as interest rates increase, bond prices decrease and vice versa Bond Prices: relationship between Coupon and Yield If YTM = coupon rate, then par value = bond price If YTM > coupon rate, then par value > bond price o Why? The discount provides yield above coupon rate o Price below par value, called a discount bond If YTM < coupon rate, then par value < bond price o Why? Higher coupon rate causes value above par o Price above par value called a premium bond IN OTHER WORDS IF RATES GO UP BOND PRICES GO DOWN Computing Yield to Maturity Yield-to=maturity is the rate implied by the current bond price Finding the YTM requires trial and error if you do not have a
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
financial calculator and is similar to the process for finding r with an annuity If you have a financial calc enter N, PV, PMT, and FV remembering sign convention (pmt and FV need to have the same sign) then compute for IY
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 5

CH 7 - Yield to maturity(YTM = APR for a bond Example YTM =...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online