The bond has three different measures of rate of

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• The bond has three different measures of rate of return: Coupon rate : annual coupon payment as a percentage of the face value (par). $80 / $1000 = 8.0% Current yield : annual coupon payment as a percentage of P0. $80 /1,567 = 5.1% Yield to Maturity : the rate that makes the price of the bond just equal to the present value of the future cash flows. YTM is APR. Relations between Bond Prices and Interest Rates Recall the formula for bond pricing: P = PV(Annuity) + PV(Face) Applying this pricing rule for different interest rates yields important observations and insights regarding the relations between market interest rates and bond prices. = × × ⎟ + × × C 2 PAF r 2 ,2 n F PF r 2 ,2 n
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