kasinkei

Chuckrox8 Wrote:
-------------------------------------------------------
> xwowsersx Wrote:
> --------------------------------------------------
> -----
> > Oh wait I think I get what you're saying: You
> mean
> > that if the required of return is 8% then then
> the
> > price of the bond will drop to ensure that the
> YTM
> > will equal 8%. Is that what you mean?
>
> You need to look at the basic relationship of
> coupon rates and yield to maturity.
>
> Coupon Rate>Current Yield>Yield To Maturity
> (Premium Bond)
> Coupon Rate=Current Yield=Yield To Maturity
> (Par)
> Coupon Rate<Current Yield<Yield To Maturity
> (Discount Bond)
>
> If you're are given that the coupon rate is 7% and
> the YTM is 8% you should know right off the bat
> that you are looking at a discount bond.


Chuckrox8, thanks for responding. I appreciate it. You're saying that, as an example, if a bond has a coupon rate of 7% and the YTM is 8% then its a discount bond. In this scenario the price of the bond is below par, making the coupon rate lower than the actual current yield. I think I understand this.

My only issue was how, in the original problem, was the example using the term "discount rate?"

Are you saying when it uses a "discount rate" of 8%, the question is simply saying that in our example we are dealing with a bond with a YTM of 8%, which in turn is the discount rate that we must apply in order to obtain the present value of this bond's cash flow?