Question

Demonstrate that you understand the difference among coupon yield, current yield, and yield to maturity with the following illustration for Morgan Stanley debt, par value of $1000: current price of $1009, coupon rate of 4.1%, issue date of September 15, 2012, settlement date of September 25, 2012, and maturity date of November 1, 2019. To solve for the yield to maturity, please use the yield formula (i.e., “Yield Example”) provided on Blackboard). Please follow it EXACTLY, noting that bond pricing is conventionally expressed in hundreds, not thousands).

Answer 1

Coupon Yield: A coupon rate is the yield paid by a fixed-income security; a fixed-income security's coupon rate is simply just the annual coupon payments paid by the issuer relative to the bond's face or par value. The coupon rate is the yield the bond paid on its issue date.

Current yield: Current yield is an investment's annual income (interest or dividends) divided by the current price of the security. This measure looks at the current price of a bond instead of its face value.

Yield to Maturity: Yield to maturity is the total return anticipated on a bond if the bond is held until it matures. Yield to maturity is considered a long-term bond yield but it is expressed as an annual rate.

Coupon Yield= $1000*4.1% = $41

Current Yield= $41/$1009*100 = 4.06%

Yield to Maturity= (C+(F-P)/N) / (F+P)/2

C= Coupon/interest payment = $41

F= Face Value = $1000

P= Current Price = $1009

N= Years to Maturity = 86.5 months(15 September 2012- 1 November 2019) = 7.2083 years.

Therefore yield to maturity = 3.954%