3.5 – Yield Flashcards

What does yield measure?

The overall return of a bond investment. (includes coupon, price, and time)

What determines a bond’s yield?

• Coupon (interest rate)

• Purchase price

• Time to maturity

Why are coupon and yield different?

• Coupon = fixed interest based on par

• Yield = actual return based on price paid

Nominal Yield (Coupon)

What is nominal yield?

The bond’s stated interest rate. (coupon)

Formula for nominal yield?

Annual income ÷ Par value

Does nominal yield change?

No—it stays constant over the life of the bond

Other names for nominal yield?

• Coupon

• Interest rate

• Stated rate

Current Yield

What does current yield measure?

Return based on current market price. (ignores time)

Formula for current yield?

Annual income ÷ Market price

Why is current yield incomplete?

It ignores:

• Time to maturity.

• Price changes over time.

For discount bonds, how does current yield compare to coupon?

Current yield > coupon
(greater than)

For premium bonds, how does current yield compare to coupon?

Current yield < coupon
(less than)

❓ Current Yield Practice Question:

⭐ A trade occurs in the OTC market and is reported as EDP 4s M'39 @ 96. What is the current yield of this bond? ⭐

EDP = Company name (can be anything)

4s = Coupon / Interest Rate of the bond

• (s = percent ‘%’ )

M = Maturity

• M‘39 = Matures in 2039

96 = Price quote for bond.

• 96% of $1000 = $960

A: 4.2 - Current Yield = Annual Income / Market Price - $40 / $ 960 = 4.2

Yield to Maturity (YTM)

What is YTM?

Total return if the bond is held to maturity

What does YTM include that current yield does not?

Time. (VERY important)

Another name for YTM?

Basis

Is YTM calculation heavily tested?

No—relationships are more important (It is not very test math heavy.)

For discount bonds, how does YTM compare to coupon?

YTM > coupon

(greater than)

For premium bonds, how does YTM compare to coupon?

YTM < coupon

(less than)

Yield to Call (YTC)

What is YTC?

Return if the bond is called at the first call date.

When does YTC apply?

Only for callable bonds.

What does YTC use instead of maturity?

• Call price

• Years to call

For discount bonds, how does YTC compare to coupon?

YTC > coupon

(greater than)

For premium bonds, how does YTC compare to coupon?

YTC < coupon

(less than)

Why is YTC highest for discount bonds?

Discount is earned faster. (less time = higher return)

🔥 Most Tested Section: YIELD RELATIONSHIPS

What is the key SIE takeaway for yields?

You MUST know the order of yields. (NOT the formulas)

⚖ DISCOUNT BOND RELATIONSHIP

Yield order for DISCOUNT bonds (lowest → highest)?

• Nominal (coupon)

• Current yield

• YTM

• YTC

What does the Discount Bond see-saw look like?

• Price ↓

• Yields ↑

👉 Order on see-saw:

• Coupon → CY → YTM → YTC

⚖ PREMIUM BOND RELATIONSHIP

Yield order for PREMIUM bonds (lowest → highest)?

• YTC

• YTM

• Current yield

  • Nominal (coupon)

What does the Premium Bond see-saw look like?

• Price ↑

• Yields ↓

👉 Order on see-saw:

• YTC → YTM → CY → Coupon

⚖ PAR BOND RELATIONSHIP

What is the yield relationship for PAR bonds?

All yields are equal.

What does the Par Bond see-saw look like?

• Balanced

👉 Coupon = CY = YTM = YTC

🧠 MEMORY TRICKS

Memory trick for yield order?

“CYM Call”

• CY = Current yield

• M = YTM

• Call = YTC

Easy way to remember discount vs premium?

• Discount → yields go UP

• Premium → yields go DOWN