Bond Terminologies

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dinesh.sundrani

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Hi Friends,

Could anyone explain me (in plain simple English) what is the difference between:

Coupon Rate, Current Yield, Yield to Maturity and also between Par/Face Value and Bond Value.

I am new to Bonds.. and recently discovered that the more I am reading about them, the more I am getting confussed with the terminologies used.

Thanks,
Dinesh S
 
Coupon rate (also called the stated rate) is the percent you get of par (usually $1000) per year. E.g. a 7% coupon rate you get $70 per year (or $35 semi annual).

Current yield is simply the dollar value of your coupon (which you find from the coupon rate) over the current price of the bond. E.g 35/985 = 3.55%.

Yield to Maturity is the total return you get from holding the bond for its entire life. You can use your TVM keys on your calculator to get it by solving for I/YR.

Par/Face value is the same thing. It is the amount that is to be repaid (usually $1000).
 
Dinesh, this might help:

http://www.investopedia.com/university/bonds/
 
Think of a bond the way it used to be: a piece of paper with information printed on it giving all the contractual details of the agreement between lender and borrower. These things used to be on the bond certificate itself: coupon rate, face value, maturity date, coupon dates, etc. They just describe what the bond really is and have nothing to do with whatever you pay for it. Learn these!

Next think about you buying that bond. It has a price at the moment. That is important to you but you need
to be able to think about how to value that price and see if it meets your investment needs or how it compares
to other investments. There are a number of measures that are important to you and all of them depend on
what the price at the moment is: current yield, yield to maturity, duration, etc. Learn all these!

Keep the two groups of details separate. It always helps me when I hear "current yield" to think this is really
"current yield at this price"; "duration" is "duration at this price"; YTM is "YTM at this price", etc.
[Technically YTM, duration, current yield, are all functions of price for this bond. Coupon rate, face value, etc.
are just facts about the bond and don't have anything to do with what is happening in the market to the
bond.]
 
Niblita75 Wrote:
-------------------------------------------------------
> Coupon rate (also called the stated rate) is the
> percent you get of par (usually $1000) per year.
> E.g. a 7% coupon rate you get $70 per year (or $35
> semi annual).
>
> Current yield is simply the dollar value of your
> coupon (which you find from the coupon rate) over
> the current price of the bond. E.g 35/985 =
> 3.55%.
>
> Yield to Maturity is the total return you get from
> holding the bond for its entire life. You can use
> your TVM keys on your calculator to get it by
> solving for I/YR.
>
> Par/Face value is the same thing. It is the amount
> that is to be repaid (usually $1000).

This is a good answer, but the YTM thing isn't quite right except for zero coupon bonds. It's the total return if you could reinvest the coupons back into the bond (which, of course, you can't).
 
niblita75, are you at UF? I'm in undergrad there, and I'm planning to take L1 in June... suggestions?
 
Thanks Niblita75 and lillie for making it crystal clear. Appreciate your help guys!!

Regards,
Dinesh S
 
Bucsbest:

Yes I go to UF and have just the Fall semester remaining. I should have graduated in the spring, but I decided to split my last four core business classes (debt, biz stat, new venture planning, financial management) into two semesters (which also gave me another football season). I started studying for the test in January. I usually put in about four or so hours a week reading SS between classes so I wouldn't have to study at night mainly because I love wasting a ton of money at Swamp throughout the week. It wasn't until about April that I was almost done with all the SS and began doing a few practice exams using Qbank. When May comes, I just went all out. I studied at least 6 hours a day, usually more and took about 4 timed exams out of book 6/7 from Schweser. One final note, when you're getting close to the exam do the CFAI sample exams. They're $50 but worth every penny. I am planning on buying all five of them for L2. Send me an email and we can talk more [email protected]. I think I am going to head back up to Gainesville a few days before classes start (23rd I think).

JoeyD:

Later last night in bed I thought about the reinvestment of coupons which is the main idea behind the whole YTM. Thanks for correcting my post.

Edit: I was looking at my first post. The Current Yield should not be 35/985, it should be 70/985.



Edited 4 time(s). Last edit at Tuesday, July 31, 2007 at 12:27PM by Niblita75.
 
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