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Chapter 28, Part II. Relation with Other Financial Markets. Page 3

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 26, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

    Aug 28, 2009
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    YTM is most complicated parameter. In fact it shows your annual return on your investments till the maturity date of a particular bond. It depends on term till maturity, coupon rate and price of the bond. For instance, if you buy bond at price that is higher than notional value – then your yield will be lower than coupon, since you’ve paid more, but coupon is calculated based on notional amount. And vice versa – if you’ve bought the bond with price lower than principal – then your annual yield till maturity will be greater than coupon payment.

    Pipruit: And why?​

    Commander in Pips: It’s simple. Assume that you’ve bought the bond at 120%, i.e. 120 K, but notional amount is 100K. During time till maturity you will receive the same coupon of 5K annually, but at maturity you will get just 100K, since this is notional amount, while you’ve paid 120K – this difference of 20K reduces your total profit from owning the bond, hence your yield will be lower than 5%. The opposite is true if you’ve bought the bond cheaper than the notional amount.

    Pipruit: And how it is possible?
    Commander in Pips: In fact, the yield of the bond is a premium for credit risk, that the lender takes on himself. For instance, if you’ve purchased the bond of General Motors and it was downgraded by S&P rating agency later, it means that this company becomes riskier, and bond price will fall, since investors will demand more premium for increased credit risk, and vice versa for upgrade. There is no possibility to change coupon or notional amount for an existing bond. The only way how the value of the bond could be adjusted is its price/yield on open market.
    #1 Sive Morten, Dec 26, 2013
    Lasted edited by : Oct 8, 2016
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