Beginning bond investors have a significant learning curve ahead of them that can be pretty daunting, but they can take heart in knowing that it's manageable when it's taken in steps. It's onward and upward after you master this. In short, "coupon" tells you what the bond paid when it was issued. But then the bond trades in the open market after it's issued. So now you have to fast-forward 10 years down the road. Let's say that interest rates go up in and new treasury bonds are being issued with yields of 4 percent.
So in simplest terms, the coupon is the amount of fixed interest the bond will earn each year.
BOND YIELD AND RETURN – CMA
Yield to maturity is the expected return if the bond is held until maturity. This yield is known as the yield to maturity , which is effectively a guesstimate of the average return over the bond during its remaining lifespan. This is the difference between the bond yield and current yield.
The bond yield looks at the original price of the bond or face value. The current yield differs from the yield to maturity in that the yield to maturity looks at all future inflows, including a higher or lower face value than its current price, to determine the yield based on a present value equal to the current price of the bond.
Coupon Rate vs Yield Rate for Bonds
The formula for current yield only looks at the current price and one year coupons. Recall that if the price of a bond goes down, the market rates or bond rate has gone up. For this example, the current yield formula would be shown as.
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