After starting this blog back in 2016, I
realised that I have yet to write a single post on bonds. Let me start the bond
ball rolling by explaining bond coupon rate and the two common bond yields
used, current yield and yield to maturity.

__Coupon Rate and Current Yield__

The coupon rate of a bond is always
calculated based on its par value. If a $1,000.00 bond’s annual coupon rate is
5%, the bondholder will get $50.00 per year (5% of $1,000.00 = $50.00).

Like any investments, the market value of a
bond will fluctuate depending on its demand and supply. Since the coupon rate
is fixed, we could use current yield calculations to see if it is higher or
lower than the coupon rate.

If the market price of the bond is $950.00,
the current yield would be $50.00/$950.00 x 100% = 5.26%.

If the market price of the bond is $1,050.00,
the current yield would be $50.00/$1,050.00 = 4.76%.

From the calculations, it is observed that
if the bond is at a premium (above the par value), the yield would be lower
than the coupon rate, and vice versa if the bond is at a discount (below the
par value).

__Yield to Maturity__

Another way to look at bond yields would be
the yield to maturity (YTM). According to Investopedia, YTM is “

*the total return anticipated on a bond if the bond is held until it matures”*^{1}, and some bond investors prefer to look at YTM as it could be used to compare with other bonds that have different coupon rates and tenures.
Calculating YTM is a bit more difficult
than calculating current yield as the former involves present value
calculations, but the good news is there are online calculators available.

Providing some examples, if a $1,000.00
bond with a 5% coupon rate (paid annually) and 10-year tenure is priced at
$950.00 in the financial markets, the YTM would be 5.67%. If the same bond is
priced at $1,050.00 instead, the YTM is 4.37%.

__Relationship Between Coupon Rate, Current Yield and YTM__

From the above example calculations, we can
clearly see the relationship between the coupon rate, current yield and YTM. Below
shows the relationship summary conveniently.

Bond priced at par: coupon rate = current
yield = YTM

Bond priced at premium: coupon rate >
current yield > YTM

Bond priced at discount: coupon rate <
current yield < YTM

*1 – Investopedia. Yield to Maturity. https://www.investopedia.com/terms/y/yieldtomaturity.asp. (accessed 27 Mar 2018).*

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