Coupon vs. YTM

CFA Level II
#1

I have trouble understanding why this is. Can anyone explain? Thanks!

Any difference between the fair value and par value of the security is amortized over its term.

  • When the par value exceeds fair value, the securities trade at a discount. This occurs when the effective interest rate is greater than the stated interest (coupon) rate.
  • When the par value is lower than fair value, the securities trade at a premium. This occurs when the effective interest rate is lower than the stated interest (coupon) rate.
#2

Mostly just need help with the parts comparing the YTM to the coupon.

#3

Ues your time value calcuations.

If the coupon is 5% and the YTM is 4%, then you will have a premium bond… Why? Because the yield is only 4 but you’re getting a higher coupon.

If the coupon is 5% and the YTM is 6%, then you have a discount bond… Why? Because you’re only getting 5% coupons when the yield is 6%.

Now punch that into your calculator

PMT = 50, FV = 1000, N=20, I/Y = 4 , solve for PV and you get $1135, a premium bond.