Unformatted text preview: price of the
bond changes: (13) Rate of return on bond coupon income price change
investment Because bond prices change when the interest rate changes, the rate of return earned on the bond will
fluctuate with the interest rate. Thus, the bond is subject to interest rate risk. All bonds are not equally
affected by interest rate risk, since it depends on the sensitivity to interest rate fluctuations.
The interest rate required by the market on a bond is called the bond's yield to maturity. Yield to maturity
is defined as the discount rate that makes the present value of the bond equal to its price. Moreover, yield
to maturity is the return you will receive if you hold the bond until maturity. Note that the yield to
maturity is different from the rate of return, which measures the return for holding a bond for a specific
time period. Download free ebooks at bookboon.com
18 Corporate Finance Present value and opportunity cost of capital To find the yield to maturity (rate of return) we therefore need to solve for r in the price equation.
- What is the yield to maturity of a 3-year bond with a coupon interest rate of 10% if
the current price of the bond is 113.6?
Since yield to maturity is the discount rate that makes the present...
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