Relationship Between Yield To Maturity and Coupon Rate
The concept of current yield is closely related to other bond concepts, including yield to maturity, and coupon yield. When a bond sells at;
- a discount: YTM > current yield > coupon yield
- a premium: coupon yield > current yield > YTM
- par: YTM = current yield = coupon yield.
Current Yield = Total Yield - Capital Gains Yield
The current yield is the annual payment divided by the price. Algebraically expressed as Y = R/P, where Y is yield, R is the annual payment, and P represents price. This creation shows the fine line between high and low returns over more than one period. A high yield will produce a relative payment and a low yield will do the same. When the yields of several periods are compared a higher yield will show a higher payment with less risk associated. This equates to investors expecting a higher yield over a length of investing. The possibility of market risks are ignored.
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