yield to maturity

daddybcat · #1 May 22, 2007, 08:48 AM

A coworker of yours was discussing her investments with a broker. Your coworker was confused because she had purchased a 10% bond but the broker kept repeating that it had a 9% yield to maturity.

goldenbutterfly · May 22, 2007, 10:20 PM

The 10% bond is the coupon rate stated on the face of the bond. She will be receiving 10% return on the face value of the bond on every interest payment date. However, due to effects of supply and demand and the timing of the purchase, she may be paying a discount or a premium on the bonds. If she will be paying a premium, she will be getting a yield to maturity that is lower than the 10% coupon rate, which at this instance is 9%.



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