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Unformatted text preview: current market price (which does not always equal its par value). To illustrate, suppose that a firm issues a bond with a $1,000 par value and promises to pay investors $35 every six months over the life of the bond. The bond’s coupon is $70 per year, and its coupon rate is 7 percent ($70/$1,000). If the current market value of this bond is $980, then its coupon yield is 7.14 percent ($70/$980). When interest rates raise, the prices of outstanding bonds fall; when rates fall, prices rise. This does not affect the coupon rate, but it will lower the coupon yield and the yield to maturity. Because the bond now sells at a premium, there is a builtin capital loss for the investor who paid par value and holds the bond to maturity. Compensating for this loss is the fact that the bond’s coupon yield will be greater than the yield to maturity. So in order we have: Coupon rate > coupon yield > YTM....
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This note was uploaded on 10/15/2011 for the course FIN 550 taught by Professor Smith during the Spring '11 term at Berklee.
 Spring '11
 Smith
 Interest, Interest Rate

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