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 semiannual 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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 Spring '11
 Mimir

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