Question

Is the yield to maturity on a bond the same thing as the required return? Is YTM the same thing as the coupon rate? Suppose today a 10 percent coupon bond sells at par. Two years from now, the required return on the same bond is 8 percent. What is the coupon rate on the bond then? The YTM?

Answer 1

Answer:

(a) Yes, especially for noncollable bond.

(b) No

(c) The coupon rate remains at 10%, i.e. it is constant.  The YTM is the required return of 8% on the bond.

Explanation:

(a) Is the yield to maturity on a bond the same thing as the required return?

Yes, especially for noncollable bond. The yield to maturity (YTM) can be described as the required rate of return on a bond which is given as a nominal annual interest rate. In the of a noncallable bond, terms yield to maturity and required rate of return can be used interchangeably.

(b) Is YTM the same thing as the coupon rate?

No. While both YTM and required return can be used as interest rates in the valuation of cash flow of bond, coupon rate cannot be used for this purpose. This is because when the amount of coupon payment is being set, the coupon rate is the rate is used as a fixed percentage of par over the life of the bond.

(c) Suppose today a 10 percent coupon bond sells at par. Two years from now, the required return on the same bond is 8 percent. What is the coupon rate on the bond then? The YTM?

In this situation, the coupon rate remains at 10%, i.e. it is constant.  

The YTM is the required return of 8% on the bond.

Answer 2

Answer:

1) The yield to maturity is required rate of return on a bond expressed as a nominal annual interest rate. For noncallable bonds, the yield to maturity and required rate of returns are interchangeable terms

2) Unlike YTM and required return, the coupon rate used as the interest rate in bond cash flow valuation, but is fixed percentage of par over the life of the bond used to set the coupon payment amount.

3) The coupon rate is constant at 10%. The YTM is 8%.

Explanation: