Personal Investment Management
ADMS 3531 Fall 2011 – Professor Dale Domian
Lecture 9 Part 2 – Bond Prices and Yields – Nov 15
Chapter 11 Outline
Straight bond prices and yield to maturity.
More on yields.
Interest rate risk and Malkiel’s theorems.
Dedicated portfolios and reinvestment risk.
A straight bond is an IOU that obligates the issuer of the bond to pay the holder of the
o A fixed sum of money (called the principal, par value, or face value) at the bond’s
maturity, and sometimes
o Constant, periodic interest payments (called coupons) during the life of the bond.
Special features may be attached:
o Convertible bonds.
o Callable bonds.
o Putable bonds.
Two basic yield measures for a bond are its coupon rate and its current yield.
Coupon rate =
Current Yield =
Straight Bond Prices and Yield to Maturity
The price of a bond is found by adding together the present value of the bond’s coupon
payments and the present value of the bond’s face value. The yield to maturity (YTM) of a bond is the discount rate that equates the today’s bond
price with the present value of the future cash flows of the bond.
Premium and Discount Bonds
Bonds are given names according to the relationship between the bond’s selling price and
its par value.
o Premium bonds
Price > par value
YTM coupon rate
o Par bonds
Price = par value
YTM = coupon rate
In general, when the coupon rate and YTM are held constant:
o For premium bonds – The longer the term to maturity, the greater the premium
over par value.
o For discount bonds – The longer the term to maturity, the greater the discount
from par value.
Relationships among Yield Measures
For premium bonds
o Coupon rate > current yield > YTM
For discount bonds
o Coupon rate