Question

The following information from the close of trading on November​ 24, 2010 is for an IBM bond with a face value of ​$1 comma 0001,000 and a maturity date of June 15 comma 2013June 15, 2013​: Coupon​ rate: 7.57.5​% ​Price: ​$1 comma 1581,158 Yield to​ maturity: 1.221.22​% The​ bond's current yield was nothing​%. ​(Round your response to two decimal​ places.) Why is the​ bond's yield to maturity less than its coupon​ rate?

Answer 1

Why is the​ bond's yield to maturity less than its coupon​ rate?

Mostly investors review two vital information, the yield to maturity (YTM) and the coupon rate while investing in bonds. Bonds are considered as investments for retirement age and maturity funds like other savings accounts.

Now yield to maturity (YTM) is the estimated annual rate of return for a bond assuming that the investor holds the asset until its maturity date where as the coupon rate is the earnings on the amount invested in bonds which investor can expect to receive from holding a particular bond. At same time the coupon rate is also known as the yield from the fixed-income product.

The coupon rate of the bond is usually same when the bond is 1st issued, whereas in (YTM) it is assumed that all interest payments received are reinvested at the same interest rate as the bond itself that is why (YTM) includes the coupon rate in its calculation. Now due to changes in interest rate the coupon rate also increase and decrease because the calculation of coupon rate is calculated from the yearly received based on the face value of the security.

Since YTM represents the average return of the bond over its remaining lifetime, so until maturity, coupon rate, current price, and the difference between price and face value etc and yield to maturity calculation includes all potential gins and losses so YTM may be less to its coupon rate.