The spot rate is the rate of return earned by a bond when it is bought and sold on the secondary market without collecting interest payments. You will see the term "spot rate" used in stocks and commodities trading as well as in bonds, but the meaning can be different. Bonds ar...
The yield on bonds is inversely related to the market interest rate, meaning that the higher the YTM, the less sensitive the bond prices are to interest rate fluctuations. How to Calculate Yield to Maturity (YTM)? Yield to maturity (YTM) is one of the most frequently used returns metrics ...
In this example, the par value of the bond is $100, but it is priced below the par value at $95.92, meaning the bond is priced at a discount. The annual interest rate must be greater than the coupon rate of 5%. Investors calculate and test several bond prices by plugging various annu...
Because bonds trade in the secondary market, they may sell for less or more than par value, yielding an interest rate that differs from the nominal yield, called the current yield, or current return. Since bond prices move oppositely of interest rates, bond prices decrease when interest rates...
Now that you understand the bond YTM meaning and how to calculate the bond YTM, let's explore its importance in analyzing bonds: Bond dynamics are complex. A bond with a higher coupon rate does not mean that it gives you a better return. The magnitude of the face value means little to...
The YTM meaning Before discussing the YTM calculation, we must first understand what a bond is. A bond is a financial instrument that governments and companies issue to get debt funding from the public. If you hold a bond, you are entitled to collect a fixed set of cash payments. In ...
In this example, the par value of the bond is $100, but it is priced below the par value at $95.92, meaning the bond is priced at a discount. The annual interest rate must be greater than the coupon rate of 5%. Investors calculate and test several bond prices by plugging various annu...