Because of this bidding-up process, your bond will trade at a premium to its par value. Your buyer will pay more to purchase the bond, and that premium the buyer pays will reduce the yield to maturity of the bond, so it is in line with what is currently being offered.
Understanding Bond Yields - Types of Bond Yields | Online Trading Academy
By contrast, a bond discount would enhance, rather than reduce, its yield to maturity. We always want to purchase bonds with the highest YTM, given equivalencies in maturity, credit worthiness, and industry. No one wants to run out of money.
- Nominal & Effective Yield to Maturity | Finance - Zacks;
- Bond Yield to Maturity (YTM) Calculator!
- Nominal & Effective Yield to Maturity | Finance - Zacks;
- Bond Yield to Maturity (YTM) Calculator;
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Blog Newsletters Client Login. About Team Contact Client Login. The terms reflect the current market pricing, not the quality, of particular bonds. What is a Discount Bond?
Understanding Bond Yields
Let's say that interest rates go up in and new treasury bonds are being issued with yields of 4 percent. So in simplest terms, the coupon is the amount of fixed interest the bond will earn each year.
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Yield to maturity is the expected return if the bond is held until maturity. This yield is known as the yield to maturity , which is effectively a guesstimate of the average return over the bond during its remaining lifespan.
As such, yield to maturity can be a critical component of bond valuation. A single discount rate applies to all as-yet-unearned interest payments.
Use the Yield to Maturity as you would use other measures of valuation: a factor in your decision whether to buy or avoid a bond. You can compare YTM between various debt issues to see which ones would perform best.
What is Bond Pricing Formula?
Note the caveat that YTM though — these calculations assume no missed or delayed payments and reinvesting at the same rate upon coupon payments. By day he writes prose and code in Silicon Valley. He's mids, married, with two kids.