Easy Understanding of Coupon Rate, Current Yield and Yield to Maturity - CA Final SFM

Coupon Rate

Coupon Rate is the fix Rate of Interest which a bondholder receives as Interest Payment. Coupon Rate remains same until the bond matures.

Current Yield

Current Yield is Rate at which a bondholder receives as Interest Income on the Current Value of Bond.

Current Yield = Interest/Market Price of Bond

Current Yield is the relationship between Interest Income (Coupon) and Current Value of Bond. Current Yield will change when current value of bond changes, as Interest (Coupon) to Bondholder remains unchanged.

Relation between Current Yield and Value of Bond – Bond Value Theorems

Current Yield (Yield Rate) = Coupon Rate

Then Bond is selling at Par.

Explanation: - Current Yield is relation between Coupon and Value Bond and Current yield changes according to changes in value of Bond. It means current yield will remains same as coupon only when value of bond is equal to par value bond or we can say that value of bond will be equal to par value only when current earning rate (Yield Rate) is equal to coupon rate. Therefore, when Current Yield Rate (Yield Rate) is equal to Coupon Rate than bond will sell at par Value.

Current Yield (Yield Rate) > Coupon Rate

Then Bond is selling at Discount.

Explanation: - Current Yield is relation between Coupon and Value Bond and Current yield changes according to changes in value of Bond. Coupon Rate remains unchanged and Current Earing Rate of Bond Increases, it means value of bond decreases. Therefore, when value of bond is start decreasing then current earning rate should start increasing.

      

Current Yield (Yield Rate) < Coupon Rate

Then Bond is selling at Premium.

Explanation: - Current Yield is relation between Coupon and Value Bond and Current yield changes according to changes in value of Bond. Coupon Rate remains unchanged and Current Earing Rate of Bond decreases, it means value of bond increases. Therefore, when value of bond is start increasing then current earning rate should start decreasing.

Yield to Maturity (YTM)

YTM is Rate of Earning if bond is held until Maturity.  

YTM = [(Interest + (Redemption Value (RV) - Net Proceeds (NP))/Maturity Period of Bond]/[(RV+NP)/2]

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