Yield to Maturity is well known tern in Bond valuation. It
represents a discount rate at which intrinsic value of the bond equals to its
market value. In simple words if a person holds a bond till the date of
maturity the rate of return one earns is known as Yield to Maturity.
Coupon rate is also known as interest rate in bond
valuation. It is the rate of return which is stated in the face of the bond.
When a investor invests in bond he gets returns of has/her investment in
accordance with this rate. But frequency of payment is dependent on term of
issue of bond.
Relationship
between Coupon rate and Yield to Maturity regarding bond:
1.
When
required rate of return equal to coupon rate the bond should be sell at par.
2.
When required rate of return is higher than
coupon rate the bond should be sold at discount.
3.
When required rate of return is lower than the
coupon rate the bond should be valued at premium.
Here required rate of return means
Yield to Maturity.
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