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!

lc26mizzou

Great, thanks!

bluejazzy

Thanks Joey. Agreed that these would all be equal if the term structure of interest rates are flat. However, the question refers to 'coupon yield'.

"Coupon rate = Nominal yield = Coupon Yield" should be true since they all use: annual coupon / face value

Is this correct?

shootingstar

Nope. It's the same if the bond is selling for par.

thisisbrianly

Thanks SpyAli - I feel comfortable differentiating between YTM, Coupon Rate and Current Yield.

My query is about the other unconventional terms which have been thrown into the question: Nominal Yield and Coupon Yield.

My finding is: "Coupon rate = Nominal yield = Coupon Yield". Have a read on the previous 5 posts above for details.

Are you able to confirm?

cchang

The question isn't that difficult - I think it looks that way due to a few interrelated terms.

In my view, Coupon rate = Nominal yield = Coupon Yield.

Can someone please confirm?

rkapoor

The coupon rate, nominal yield, and current yield would only be the same if________

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?

spartanag07

So back to your original question, how could the answer be D? Shouldn't it be C,
Nominal < YTM?

kamara5

What is Nominal Yield?