Whats the difference between Yield to Maturity vs Coupon Rate for bonds?
How is 10.44% Yield to maturity calculated from a Coupon rate of 9%?
Coupon Rate : This is the official interest rate that a Bond pays interest at, on the face value of the Bond. Say a Bond has the following details :
Face Value of Bond = Rs 1000 Coupon Rate = 10% Issue Date = 10th May 2018 Maturity Date = 10th May 2022, interest to be paid annually. —> Then this Bond will pay Rs 100 every year on 10th May, till 2022.
Yield to Maturity :
Now the Bond gets bought and sold in the secondary market. Say the current price at which I get to buy it is = Rs 1010 (premium price). I buy this on 10th May 2019. Then my yield to maturity will be the effective interest rate that I will earn on the Bond annually. The yield to maturity will be ~ 9.59%
YTM of 10.44% on a bond with coupon of 9% is possible when the Bond is selling in the market at a discount price. You can use XIRR formula in MS Excel to calculate a Bond’s yield.
1 Like