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Post by fishingrod on Sept 7, 2022 22:17:57 GMT
fishingrod ,This bond was paying 8.81% at $99.33 issue price. It is not callable (no YTWC) so todays yield is 8.81% x (99.33/123.20) = 7.10%. Why is YTM only 5.46%? The bond is paying and was paying 8.75% which is the coupon, which is fixed for the life of the bond, regardless of price.
Today's YTM reflects the price of $123.20 (a premium) which will give one a capital loss on maturity of the bond. If one buys a bond at a premium one can expect a capital loss at maturity, and if one buys at a discount, one can expect a capital gain at maturity because the bond will mature at par/face value $1000 regardless if one bought at discount or premium.
Remember the yield is a combination of the coupon which is fixed and paid out for the life of the bond and the capital gain or loss because of the discount or premium paid for the bond, if the bond is held to maturity.
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Post by Chahta on Sept 7, 2022 22:28:05 GMT
Got it. The YTM considers the cap gain/loss as well as the coupon.
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