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Zorluk: ZorDebt Securities and Bond Structure

An investor acquires a 15-year corporate bond with a par value of 1,0001,000 and a nominal yield of 6.0%6.0\%, which pays semi-annual coupon payments of 3030. The bond was originally purchased in the secondary market at a discount price of 960960. Following a general decline in prevailing market interest rates, the bond's market price increases to a premium price of 1,0401,040. At this new market price of 1,0401,040, which of the following statements correctly describes the yield relationship hierarchy for this bond?

  1. Nominal yield is greater than current yield, which is greater than yield to maturity.Cevap
  2. B
    Yield to maturity is greater than current yield, which is greater than nominal yield.
  3. C
    Current yield increases above the nominal yield because interest rates declined in the overall market.
  4. D
    Nominal yield decreases below current yield because the bond issuer's default risk has increased.

Cevap

When the bond trades at a premium of 1,0401,040, its nominal yield (6.0%6.0\%) is greater than its current yield (5.77%5.77\%), which is greater than its yield to maturity.
When a bond is purchased or trades at a premium (market price of 1,0401,040 exceeding 1,0001,000 par value), the investor pays more upfront than will be returned at maturity. As a result, the current yield (60/1040≈5.77%60 / 1040 \approx 5.77\%) is less than the nominal yield (6.0%6.0\%). Furthermore, because the investor amortizes the 4040 premium loss over the remaining 15 years, the Yield to Maturity (YTM) is even lower than the Current Yield. Thus, the relationship is Nominal Yield > Current Yield > Yield to Maturity.

Adım Adım Çözüm

1
Identify the nominal (coupon) yield and payment structure of the bond.
The nominal yield is fixed at 6.0%6.0\% of 1,0001,000 par value, which equals 6060 annually (3030 semi-annually).
Nominal yield is based on the par value and fixed coupon rate established at issuance.
2
Determine the new market pricing condition after interest rates fall.
The bond's secondary market price rises to 1,0401,040, placing it at a premium (market price > par value).
Bond prices move inversely to market interest rates.
3
Calculate the current yield at the premium market price.
Current Yield = Annual InterestMarket Price=601040≈5.77%\frac{\text{Annual Interest}}{\text{Market Price}} = \frac{60}{1040} \approx 5.77\%.
Current yield measures the annual coupon income relative to the bond's current market price.
4
Establish the yield hierarchy for a bond trading at a premium.
Nominal Yield (6.0%6.0\%) > Current Yield (5.77%5.77\%) > Yield to Maturity (< 5.77%5.77\%).
For premium bonds, the investor loses the premium amount (4040) over the remaining life to maturity, making YTM lower than CY, and CY lower than NY.

Anahtar Kavram

Bond Yield Hierarchy (Discount vs. Premium)
Tahmini Süre:1m 30s
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Konular

Debt Securities and Bond Structure

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