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Question

Difficulty: EasyDebt Securities and Bond Structure

Which of the following bond yields remains constant throughout the life of a traditional fixed-rate corporate bond, regardless of changes in prevailing market interest rates or the bond's market price?

  1. Nominal yieldAnswer
  2. B
    Current yield
  3. C
    Yield to maturity
  4. D
    Yield to call

Answer

The nominal yield (or coupon rate) is set at issuance and remains fixed over the life of the bond.
The nominal yield (coupon rate) is established when the bond is issued and remains fixed for the entire duration of the bond contract. It specifies the fixed annual dollar interest paid relative to the $1,000 par value.

Step-by-Step Solution

1
Define nominal yield
Nominal yield represents the annual interest payout expressed as a percentage of the bond's fixed face value ($1,000 par).
The contractual coupon rate printed on the bond indenture does not change.
2
Compare nominal yield with market-driven yields
Current yield, yield to maturity (YTM), and yield to call (YTC) all depend on the bond's secondary market trading price, which fluctuates inversely with interest rates.
Market prices fluctuate daily, while the nominal coupon payment remains constant.

Key Concept

Nominal Yield Constancy
Estimated Time:45s
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Topics

Debt Securities and Bond Structure

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