Yield to Maturity

# Yield to Maturity - 10 What does this do to the value of...

This preview shows page 1. Sign up to view the full content.

Yield to Maturity From Last Time The difference between the 4 types of loans (simple loans, discount bonds, coupon bonds, and fixed payment loans) is simply the repayment schedule. Yield to Maturity The yield to maturity is the interest rate that equates the present value of an asset's payments with its value today. The interest rate that answers the question "If I pay a price P for a set of future payments, at what interest rate could I invest P and get the same future payments?" is the yield to maturity. To find the yield to maturity, set today's value equal to the present value of the stream of payments and solve for the interest rate. Bond Prices and Interest Rates Suppose you hold a bond that you paid \$1000 for that pays you \$80 a year in interest. The interest rate on that bond is 8%. Suppose that now a bond that costs \$1000 pays \$100 per year in interest. The interest rate is
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 10%. What does this do to the value of your bond? If you want to sell it, the purchaser will want to receive a 10% interest rate because that's what new bonds are paying. So, she will pay \$800 for your bond because (\$80/\$800) = 10%. So, the value of your bond falls when interest rates rise. Bond Prices and Yield to Maturity • discounting future payments at a higher interest rate reduces the present value of the payments and bond prices • a lower yield to maturity raises the present value of the future payments and the price of the bond • the longer the maturity of a bond, the larger will be the price change in response to a change in the yield to maturity yield to maturity = f(current yield, F - P) 1. when F = P, yield to maturity (i) = current yield(C/P) 2. when P < F, i > C/P 3. when P > F, I < C/P...
View Full Document

{[ snackBarMessage ]}

Ask a homework question - tutors are online