Difference between Yield - Exam question question

slackeranalyst

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!

Finalnub

B. because current yield( current coupon/current price in this case above par value) is going to be less than YTM.

chetan86

I said B too the answer is D tho. I hate getting easy questions like this wrong

draz

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

Beatnik

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?

bapswarrior

Great thank u

dotamasta

YTM = Nominal Yield?
Current yield = coupon yield?

kamara5

What is Nominal Yield?

btcapital

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.



Edited 1 time(s). Last edit at Wednesday, November 12, 2008 at 08:24AM by JoeyDVivre.

smartpants

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?