Fixed Income Class Notes Chapter 3

Fixed Income Class Notes Chapter 3 - Fixed Income Class...

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Fixed Income Class Notes Chapter 3 – 10/27/11 Yield to Maturity or Yield – the single rate that when used to discount a bond’s cash flows, produces the bond’s market price. When a coupon rate equals yield to maturity, bond price equals face value, or par . Intuitively, if it is appropriate to discount all of a bond’s cash flows at a given rate, then a bond with a coupon rate is paying the market rate of interest. If the coupon rate exceeds the yield, then the bond sells at a premium to par, that is, for more than face value. If the coupon rate is less than the yield, then the bond sells at a discount to par, that is, for less than face value. Since the coupon rate is below the market rate, an investor will demand more than their initial investment at maturity. Figure 3.1 illustrates premium and discount curves vs. par An annuity with semi-annual payments is a security that makes a payment every six months for a stated period of years but never makes a final principal payment.
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This note was uploaded on 12/15/2011 for the course ECON 101 taught by Professor Mimir during the Spring '11 term at Maryland.

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