BONDS - Bonds Keynes said that"The rate of interest is the reward for parting with liquidity for a specified period of time We usually think of

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Bonds Keynes said that “The rate of interest is the reward for parting with liquidity for a specified period of time.” We usually think of that reward as yield. Yield is the annual rate of return over cost, considering both interest payments and any difference between cost and sale price. Yield is sometimes called effective interest rate. A bond is an obligation by the seller (or the borrower) to pay the buyer (or the lender) a fixed sum of dollars per year over the maturity of the bond. The fixed sum is called the coupon. When the bond matures, the borrower must pay the lender the par value, or principal, of the bond. Suppose you have a bond that promises to pay a par value of $1,000 at the end of a year, and a $60 coupon as well. You are thinking about adding this bond to your portfolio at a price, P, and you want to know what the effective interest rate will be. We will talk about three concepts for this problem -- coupon yield, current yield, and yield to maturity. Coupon yield is the coupon expressed as a percentage of the par value of the bond: $60/$1000 gets 6%. This concept ignores the price you pay for the bond, and
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This note was uploaded on 01/18/2012 for the course ECO 202 taught by Professor Normmiller during the Spring '08 term at Miami University.

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BONDS - Bonds Keynes said that"The rate of interest is the reward for parting with liquidity for a specified period of time We usually think of

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