Market yield and YTM

CFA Level I
#1

Hi all, What is the difference between market yield and YTM? Thanks When the coupon rate is greater than the market yield, and the market yield is greater than the yield to maturity the bond is a: A) premium bond. B) par value bond. C) discount bond. D) zero-coupon bond.

#2

Market yield is essentially rate that the market is paying at the moment for a particular bond. YTM is the actually amount you will earn if you hold the issue until it matures.

#3

A. - Premium bond Market yield is just another expression for current yield. When u have coupon>current yield>YTM the bond is selling at a premium. Try working this out through an example.

#4

I agree with mcf: Market yield= current rate on the market YTM= return that you will earn if you hold the issue to maturity. Therefore, YTM is a combination of single spot rates (market yield). This is the base of bootstrapping and forward rates calculation. However the correct answer is A.

#5

Is it possible to have coupon rate > the market yield, and the market yield < yield to maturity?

#6

Dreary, if the market yield < yield to maturity your bond is issued at discount

#7

Dreary try working out that through an example. Let’s say C = 8% PV = 1079 FV = 1000 N = 20 sa bond Coupon = 8% Current(market) yield = 80/1079 = 7.41% YTM = 6.89% I would say, no it is not possible to have C>current and current

#8

I think so, but not sure how to explain it. So, we have to remember that: 1) Coupn rate% > current yield% >YTM for a premium bond 2) Coupn rate% < current yield% < YTM for a discount bond 3) Coupn rate% = current yield% = YTM for a par bond right?

#9

" YTM is the actually amount you will earn if you hold the issue until it matures." Is not right. That only happens with a zero or if you can reinvest all the coupons at the ytm rate.

#10

Absolutely. Not only that but it is practically impossible to reinvest at the YTM. Try that.

#11

Guess that might be why people buy zeros…

#12

JoeyDVivre Wrote: ------------------------------------------------------- > Guess that might be why people buy zeros… yeah, if you’re a tax deferred account, otherwise zeros are lousy investments to hold!

#13

I know that’s the party line, but it’s really only true if you have a cash flow problem. There are all kinds of situations in which the convexity and lng duration of zeros outweighs the cash flow problem.