Bond Yields for Discount Bonds - Yield to Maturity

Bonds are a big subject on the Series 7 Test and many students need help with them. Most Series 7 Exam students have little experience with Bonds and most will not trade them directly in their Broker Adviser Career.

Bonds that trade in the secondary market are mostly traded at a discount or a premium. The Coupon rate or Nominal Yield is a fixed rate of interest paid to par, so if a bond is purchased at a discount, your overall Yield or Yield to Maturity (your TRUE Yield) will be higher.

This is because the fixed interest rate is paid to par and you have paid below Par.

Example:

3%  10 yr Corporate Bond is priced at 99.00 

And you want to buy 10 bonds. Each Bond is $1,000. So, $10,000 would be par if the price was 100.00. But since it is 99.00, your total purchase would be $9,900 but you would still receive 3% interest payable to $10,000 PLUS, assuming you hold the bond to maturity, you will get back $10,000.

All Bonds mature at par

Your overall Yield to maturity would be higher than 3% and will always be higher than the nominal yield when bought at a discount and held to maturity. 

Next post will be on Premium Bonds and their yield relationship.

American Investment Training - Broker Licensing and Free Career Help