Define yield to maturity, coupon, time to maturity yield to call please answer in essay form

Define yield to maturity, coupon, time to maturity yield to call

please answer in essay form

Solutions

Expert Solution

Yield to maturity : It is total return anticipated on bond if the bond is held till maturity. It is expressed as an annual rate. It can be found using following formula

YTM = Interest +([Face value - selling price of bond]/2) / [Face value + selling price of bond]/Number of year till maturity

In other words it is internal rate of return of an investment in a bond if the investor holds it until maturity , assuming that all the payment are re invested at same rate

Coupon rate : It is rate at which bond holder gets interest payment. Say coupon rate is 10% and face value is 1000$ than bond holder will get 100$ as interest (1000*10%)

Time to maturity : The period till which bond will not get redeemed. if Time to maturity of bond is 6 years than bond will get redeemed after 6 years onle

Yield to call: Sometimes bond issuer includes a call option on bond to protect themself from unfavourable movement in interest rate. For example in interest in market drops substantially than the issuer will stuck with high interest payment. in that case it can call back the bond.

YTC can be calculated as under

Interest +([Face value - call price of bond]/2) / [Face value + call price of bond]/Number of year

jeff jeffy answered 1 year ago

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