question is the yield to maturity on a bond the same thing as the requiredreturn

Question

question           is the yield to maturity on a bond the same thing as the requiredreturn? us YTM the same thing as the coupon rate? suppose today a10 % coupon bond sells at par. two year from now, therequired returen on the same bond is 8 percent what is the couponrate on the bond now? the ytm? question           is the yield to maturity on a bond the same thing as the requiredreturn? us YTM the same thing as the coupon rate? suppose today a10 % coupon bond sells at par. two year from now, therequired returen on the same bond is 8 percent what is the couponrate on the bond now? the ytm?

Explanation / Answer

A bond's YTM is the rate you'd get if you held the bond to maturity and collected all of the interest payments. It's similar to buying a bank CD. Let's say that the bank will give you 5% for a 2 year CD. If you held onto that CD for the entire 2 years, you'd get all those 5% interests. So your "YTM" here would be more than 5%. With a bank CD, we call that rate you'd earn at the end, APR or effective yield (rate). Well this same concept applies to bonds. The only difference is what we call the rate you'd earn by holding onto the bond the entire time. With bonds, it's called the YTM. So YTM and APR mean the same thing! But remember, a bond's coupon rate is the stated rate of the bond itself. Each bond guarantees you a specific rate. So a 7%, 30 year bond has a coupon rate of 7%. That rate won't change over the life of the bond. So each and every year for the next 30 years, you'd get 7%. The required return is what you'd like to make. So the bond may pay 7%, but you'd really like to get 8%. That 8% would be your discount rate when calculating the value of the bond. And there's a relationship between the required (discount) rate and the bond's coupon rate. So required (discount) rate = what investors would like to earn. Coupon rate = what the bond actually pays.

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