MAF202 Lecture Notes - Lecture 5: United States Treasury Security, Normal Distribution, Nominal Yield
Document Summary
Yield on bond = return on bond when the bond is held under maturity. Interest rate (coupon rate) on bond maturity is known when issued, but yield on bond may not be known because it depends on future interest rates. Bond sold before maturity date may incur capital gain or loss. Bond yield vs. interest rate on a bond: Yield is therefore the total return on an investment, comprising interest received and any capital gain/loss. From here onwards we assume: yield to maturity = interest rate on bond (bond is held till maturity) Economists generally plot yield to maturity on a graph (yield curve) Alan purchases a 1 year bond with a face value of for . The bond offers the year end coupon payment of . The rate of return or yield for the bond: Bond yield is the interest rate on bond. Suppose 10 year zero coupon t-bond with a face value of ,000 sells for .
