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Coupon rate and yield


coupon rate and yield

4 percent. The issuer only pays an amount equal to the face value of the bond at the maturity date. A single discount rate applies to all as-yet-unearned interest payments. The current yield changes too quickly for that kind of prediction to hold true.

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The prevailing interest rate directly affects the coupon rate of a bond, as well as its market price. Suppose you had a 1,000 face value bond with a coupon rate of 5 percent, which would equate to 50 a year in your pocket. Therefore, bonds with a higher level of default risk, also known as junk bonds, must offer a more attractive coupon rate that compensates for the additional risk. For example a bond with a 6 YTM when Treasury rates are 4 and the discount rate or margin is 2, the 2 representing the risk premium over holding treasuries. If you take todays current yield (translated into nickels and dimes) and multiply that amount by 30, youd think that would give you a good estimate of how much income your bond will generate in the next month, but thats not the case. Yield is a absolute measure, discount margins are relative measures.

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