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Unformatted text preview: tock purchases occur in the secondary market. coupon rate
The percentage of the
face value that the bondholder receives each
year until the bond
matures. Section 2 Bonds 443 16 (428-459) EMC Chap 16 11/18/05 9:34 AM Page 444 people talk about the yield on the bond as
being the same as the interest rate. For
example, someone might ask “What is the
yield on that bond?” when they are actually
referring to the interest rate.)
Now suppose that Joshua paid $1,100 for
the bond instead of $950. In this case the
yield would be $50/$1,100, or 4.54 percent.
In other words, as the price paid for the
bond rises, the yield declines.
When are the coupon rate and yield the
same? Obviously they are the same when
the price paid for the bond equals the face
value. For example, consider a bond with a
face value of $1,000 and a coupon rate of 5
percent. If the bond is purchased for $1,000,
then the yield ($50/$1,000), which is 5 percent, is equal to the coupon rate.
Robin buys a bond with the
face value of $10,000 for $9,000. The coupon
rate on the bond is 4 percent. Because the
coupon rate is 4 percent, Robin receives 4
percent of $10,000 (the face value of the
bond), or $400, each year through the time
when the bond matures. Because Robin
bought the bond for a price lower than the
face value, the bond’s yield will be higher
than the coupon rate. To find the yield, we
divide the annual coupon payment of $400
by the price of the bond ($9,000), giving us a
yield of 4.4 percent.
EXAMPLE: Two of the best known bond ratings are Standard & Poor’s and
Moody’s, both of which have informative Web sites. Bond Prices and Yields
The price that a person pays for a bond
depends on market conditions. The greater
the demand for the bond relative to the supply, the higher the price. The price is important because it determines the yield that the
bondholder receives on the bond.
Let’s suppose that Sonya is currently the
owner of a bond with a face value of $1,000
and a coupon rate of 5 percent. She decides
to sell this bond to Joshua for $950. Now we
know that the coupon payment on this
bond will be 5...
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This document was uploaded on 01/16/2014.
- Winter '14