Module 44.1: Bond Valuation and Yield to Maturity

Question 1

What is a bond’s yield to maturity?

Answer 1

the market discount rate appropriate for discounting a bond’s cash flows.

If we know a bond’s yield to maturity we can calculate its value, if we know its value (market price) we can calculate its yield-to-maturity.

Question 2

What is the formula to determine value of a zero coupon bond?

Answer 2

principal divided by the discount rate to the nth power (3 years = 3rd power)

Question 3

What will an increase (decrease) in a bonds YTM do to the price?

Answer 3

it will decrease (increase) the price

Question 4

if a bond’s coupon rate is higher than YTM, what does it mean for the price? will it be at a premium or discount?

Answer 4

if coupon is higher than YTM, it is trading at a premium to par value.

Question 5

Is the percentage change in price the same as percentage change in YTM?

Answer 5

no, the price-yield relationship is convex.

Question 6

Are bonds with lower coupon rates and longer maturities more sensitive to change in yield?

Answer 6

Yes.