8. How do you value a bond and yield to maturity?

Simple Interest

Simple interest = # of coupons * coupon payment
$1,500 = 60 * $25

Coupon yield is set when a bond is issued. It is the annual coupon divided by the par value.

Coupon Yield = 1 year coupon payments / Par Value
5% = $50 / $1,000

Compound Interest

Compound interest is a return when you keep reinvesting the coupon every time you the money.

Current Yield

Current Yield is the annual coupon divided the price.

Case 1	Case 2	Case 3
Coupon: $50	Coupon: $50	Coupon: $50
Price: $ 1200	Price: $ 1000	Price: $ 800
Current Yield = 4.2%	Current Yield = 5%	Current Yield = 6.3%

The downside of current yield is that it doesn't account for maturity.

Yield to Maturity

Compensating the weakness of current yield.

Market Price at 15 years

	$800	$1000	$1200
Coupon Yield	5%	5%	5%
Current Yield	6.3%	5%	4.2%
Yield to Maturity	7.2%	5%	3.3%