The fixed interest rate on a bond is known as it's nominal yield or coupon rate. This is the rate that the issuer pays to investors. It is fixed, never changes and is paid to par value only.
Since the nominal yield is fixed, during times of lower current interest rates - bonds with high nominal rates will be priced at a premium. If a 7% bond is trading while interest rates are only 5%, bond brokers and traders will price the bond above par, which will give the security a lower yield to maturity.
High nominal coupons provide good current income, since that is the amount that is paid in internest to the bondholder. However that interest money is only paid to par value - so the nominal yield provides part of a bond's return.
When interest rates are lower, new offerings will come out at lower nominal rates. When yields are higher - new issues come out higher. It is in the secondary market that bonds will normally trade above or below par, based on the interest rate picture on similar bonds and the nominals that they are at.
http://www.aitraining.com/bondyield.htm
Since the nominal yield is fixed, during times of lower current interest rates - bonds with high nominal rates will be priced at a premium. If a 7% bond is trading while interest rates are only 5%, bond brokers and traders will price the bond above par, which will give the security a lower yield to maturity.
High nominal coupons provide good current income, since that is the amount that is paid in internest to the bondholder. However that interest money is only paid to par value - so the nominal yield provides part of a bond's return.
When interest rates are lower, new offerings will come out at lower nominal rates. When yields are higher - new issues come out higher. It is in the secondary market that bonds will normally trade above or below par, based on the interest rate picture on similar bonds and the nominals that they are at.
http://www.aitraining.com/bondyield.htm
0 comments:
Post a Comment