Question
Asked Nov 20, 2019
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Identify/explain the relationship between coupon rate and yield to maturity for:

 

  1. Discount Bonds
  2. Premium Bonds
  3. Par Value Bonds
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Expert Answer

Step 1

Coupon Rate:

It is the amount that is paid by the issuer to the bondholder at the pre-determined intervals such as annually, semi-annually, quarterly and monthly. It is calculated on the face value of the bond irrespective of the current price of the bond.

 

Yield to Maturity (YTM):

It is the estimated amount that is paid to the bondholder at the time of maturity of the bond. It is also known as book yield and redemption yield. It is by using both face value and the current price of the bond.

Step 2

Discount Bond:

 

In discount bonds, coupon rate and YTM have inverse relation because coupon amount is higher than the amount of YTM.

Step 3

Premium Bond:

 

In premium bonds, coupon rate and YTM have inverse relation because coupon amount is lower than the amount of YTM.

...

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