Can someone answer and explain the difference between these yield measures/rates? Thanks!! Which of the following relationships is least accurate? A. Premium bond: Coupon rate> YTM; Nominal Yield > Current Yield. B. Premium bond: Nominal yield > Current Yield; current yield > YTM C. Discount bond: Coupon rate < YTM; Nominal yield < YTM D. Discount bond: Coupon Yield < YTM; Nominal Yield > YTM Is there a difference between rate and yield? How is nominal yield different from Coupon yield? I understand the coupon rate is the percentage of the bond you are going receive in payments. YTM is the yield based on mkt interest rates (the IRR of the bond) but I don’t understand the other rates and how they move with the yield curve. Thanks Peeps!
B. because current yield( current coupon/current price in this case above par value) is going to be less than YTM.
I said B too the answer is D tho. I hate getting easy questions like this wrong
It’s because your current yield need to be in the middle of the coupon and YTM for a discount bond and Coupon is always less than YTM for a discount
okay so Premium bond - Nominal Yield is on top, CY is in middle, YTM is on bottom. Discount bond - YTM is on top, CY is in middle, Nominal yield is on bottom?
Discount CouponCurrent>YTM Yes.
Great thank u
YTM = Nominal Yield? Current yield = coupon yield?
Isura, I’m just as confused as you right now. I thought nominal yield = coupon rate
What is Nominal Yield?
Nominal yield = coupon rate. It has nothing to do with market price or require any calculation. A 6% bond has a nominal yield of 6%. YTM = discount rate that equates the cash flows to the market price of the bond. It is equal to the coupon rate if and only if the bond is selling at par (KNOW THIS). Current Yield = coupon/market price of the bond. Edit: Rate and Yield are mostly interchangeable so nominal yield = nominal rate. I’ve never heard anyone say “rate to maturity” but it wouldn’t surprise me if they talked that way in New Zealand or something.
i’m sure if you had a brain far better than mine you could work out the answer to that question based on logic of the inequalities alone. Sadly I can’t so will have to make do with the definitions
You should really try to work it out. It’s good for your brain and it’s really not that hard. a) For discount bond, YTM > Coupon Rate, T or F? b) For premium bond, YTM > Coupon Rate, T or F? c) For discount bond, Current Yield > Coupon Rate, T or F? d) For premium bond, Current Yield > Coupon Rate, T or F?
T F - CR>YTM T F - CR>CY>YTM for premium I’m an expert now lol thanks guys It’s pretty easy, if the market is offering a higher rate (YTM=9%) then the bond you currently own (CR of your bond 5%), who is going to want to buy your bond when they can buy the 9% mkt rate bond? No one, so inorder to sell your bond, you have to offer it a lower price to entice people to buy it, a discount. That’s why Discount Bond = YYM>CY>CR and CY is always in the middle of the 3. Is that all correct?
So back to your original question, how could the answer be D? Shouldn’t it be C, Nominal < YTM?
because with a premium bond, the coupon rate is higher than the mkt rate (YTM) so CY must be in the middle.
The question isn’t that difficult - I think it looks that way due to a few interrelated terms. In my view, Coupon rate = Nominal yield = Coupon Yield. Can someone please confirm?
The coupon rate, nominal yield, and current yield would only be the same if________
Thanks Joey. Agreed that these would all be equal if the term structure of interest rates are flat. However, the question refers to ‘coupon yield’. “Coupon rate = Nominal yield = Coupon Yield” should be true since they all use: annual coupon / face value Is this correct?
Nope. It’s the same if the bond is selling for par.