Required return less than coupon rate

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  1. Bond Price Relations - Fidelity
  2. When is a bond's coupon rate and yield to maturity the same?
  3. When is a bond's coupon rate and yield to maturity the same?
  4. Relation between coupon rate, required rate, value, and par value
  5. Get FREE access by uploading your study materials

Since yield to maturity is highly influenced by a bond's specific interest rate, the required return on bonds at any given time will greatly affect the yield to maturity of bonds issued at that time. If market interest rates rise in the future, current bonds' yield to maturity will be lower than those offered in the future; the reverse holds true as well. David Ingram has written for multiple publications since , including "The Houston Chronicle" and online at Business.

How to Calculate the Rate of Return on a Coupon Bond

As a small-business owner, Ingram regularly confronts modern issues in management, marketing, finance and business law. He has earned a Bachelor of Arts in management from Walsh University. Tip A bond's yield to maturity measures how much it will earn over its life, while the required rate of return refers to the interest rate necessary to get investors interested in the bond.

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Bond Price Relations - Fidelity

Brought to you by Sapling. About the Author David Ingram has written for multiple publications since , including "The Houston Chronicle" and online at Business. Assume Liam wants to earn a return of Complete the following by identifying the appropriate corresponding variables used in the Intrinsic Value Equation.

Now, consider the situation in which Liam wants to earn a return of 6. Again, assume that the bond pays a semiannual interest payments and has three years to maturity.

If you round the bond's intrinsic value to the nearest whole dollar, then its intrinsic value of Options are: a. When the coupon rate is greater than Liam's required return, the bond should trade at a discount. When the coupon rate is greater than Liam's required return, the bond should trade at a premium. When the coupon rate is greater than Liam's required return, the bond's intrinsic value will be less than its par value. The firm issue the bonds to investors and pay periodic coupon payments monthly, semi annually, annually etc.

When is a bond's coupon rate and yield to maturity the same?

The current price of bond is the present value of all the payments discounted at yield to maturity. Based on its coupon rate and required return, the bond may trade at par, at discount or at premium. Become a Study. Watch 5 minute video clips, get step by step explanations, take practice quizzes and tests to master any topic. I love the way expert tutors clearly explains the answers to my homework questions.

When is a bond's coupon rate and yield to maturity the same?

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Relation between coupon rate, required rate, value, and par value

Find a degree that fits your goals. Question: Assume Liam wants to earn a return of Given your computation and conclusions, which of the following statements is true? A bond should trade at a par when the coupon rate is greater than Liam's required return. Valuation of a Bond: The firm issue the bonds to investors and pay periodic coupon payments monthly, semi annually, annually etc.

Answer and Explanation: A. Semi annual required return is 5. See full answer below. Try it risk-free.

Get FREE access by uploading your study materials

Ask a question Our experts can answer your tough homework and study questions. Popular Courses. Login Advisor Login Newsletters. Bonds Fixed Income Essentials. What is a Coupon Rate A coupon rate is the yield paid by a fixed-income security; a fixed-income security's coupon rate is simply just the annual coupon payments paid by the issuer relative to the bond's face or par value. Compare Investment Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation.

Bond valuation is a technique for determining the theoretical fair value of a particular bond.


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  • Yield to Maturity vs. Coupon Rate: What's the Difference?.

Closed-End Indenture A closed-end indenture is a term in a bond contract which guarantees that the collateral used to back the bond is not backing another bond. Understanding Bonds A bond is a fixed income investment in which an investor loans money to an entity corporate or governmental that borrows the funds for a defined period of time at a fixed interest rate. Deep-Discount Bond A deep-discount bond is a bond that sells at a significant lesser value than par. Bond Discount Bond discount is the amount by which the market price of a bond is lower than its principal amount due at maturity.

Straight Bond A straight bond is a bond that pays interest at regular intervals, and at maturity pays back the principal that was originally invested.

Valuation of a Bond:

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