which of the following statements about yield measures is/are ture? 1) nominal yield measures the current income rate 2)current yield measures the coupon rate 3) realised yield measures the expected rate of return for a bond likely to be sold before maturity. i have two confusions here, what is current income rate is it like HPR? and current yiled equals to coupon rate divided by market price of bond, so i think it is kind of measuring coupon rate? but why the answer is 3) only?? can someone please help me? thanks,
current yield as the name applies only measures the current yield of the bond. it doesn’t take reinvestment or capital gail/loss in consideration. current yield = Sum of coupons / current price of the bond nominal yield = yield above the risk free rate. nominal yield in other words is the difference between the treasury yield curve and the yield for the bond TODAY. nominal yield includes today’s credit risk etc factors, but does not consider the term structure of the treasure yield curve. realized yield = YTM. YTM measures teh expected rate of return for the bond provided it is held to the maturity and coupon payments are reinvested at the same rate as YTM of the bond. So for your answer, I’d say. 1. But i’d also say 2, if the bond PV and FV is not different at all. 3 is clearly wrong.
Nominal yield is same as coupon rate.
Nominal yield = yield above the risk free rate. ie. Nominal yield = YTM for risky asset - Riskfree rate of return of treasury (hence nominal yeild is NOT THE SAME AS COUPON RATE, take the following two examples) Treasury, C=6%, P=100, YTM = 6% RiskyAss C= 8%, P =>100, YTM = 7.4% Nominal yeild = 7.4 - 6% = 1.4% or 140 bps. According to dreary you’d get nominal yeild as 8% which is incorrect.
Check page 241 of Volume 5. Nominal rate is same as coupon rate. It doesn’t matter for this question.
nominal yield = nominal rate = coupon, but its different from nominal spread !! I always get confused when I come across these terms.
oops, thunder and dreary. you are right i screwed up nominal spread with nominal yield. I don’t think i’d ever be corrected myself if i was not reading this forum. wow.