ACC 406 Lecture Notes - Lecture 5: Current Yield, Cash Flow, Real Interest Rate
Document Summary
Note: unless otherwise stated, assume all bonds have ,000 face (par) value. The coupon payments are fixed at per year. Coupon rate = coupon payment/par value = 60/1000 = 6%, which remains unchanged: when the market yield increases, the bond price will fall. The cash flows are discounted at a higher rate. At a lower price, the bond"s yield to maturity will be higher. The higher yield to maturity on the bond is commensurate with the higher yields available in the rest of the bond market. As coupon payment remains the same and the bond price decreases, the current yield increases: when the bond is selling at a discount, in this case, the yield to maturity is greater than 8%. We know that if the discount rate were 8%, the bond would sell at par. At a price below par, the ytm must exceed the coupon rate. Current yield equals coupon payment/bond price, in this case, 80/970.
