# Bonds Yields and Coupon Rate

Let's say the face value is 1000 rupees and the coupon is 10%. The coupon will be 100 which will be issued at the end of the year if the maturity is one year. Is that correct?

If the bond's price increases to 1100 then the yield decreases to 9.09 % (100/1100).

I read that investors seek yield rather than coupon rates. Why is that? If he sells the bond at 1100, he will get a profit of 100. So why doesn't he hold till maturity price or premium price? Please clarify my assessment of this

Lets say A buys a bond of face value 1000 rupees and the coupon rate of the bond is 10% then the Coupon amount will be 100 which will be issued at the end of the year if the coupon rate is for a year ! Is that correct?

Yes.

But if there is a change in market price then the maturity value of the bond increases and rises to 1100 so the bond yield reduces 100/1100 =9.09 %

No - the maturity value of the bond does not change. The bond holder will still get 1000 when the bond matures.

The yield gives a sense of the value of a bond regardless of coupon rates. Remember that coupon rates (for a fixed-rate bond) and redemption value do not change over the life of a bond. So if a bond's yield increases, that means that it can be bought (or sold) for a lower price - meaning that you get more relative to the purchase price.

So if a bondholder holds a bond whose yield increases, that means that the price has gone down - it does not mean that the coupons or redemption value has changed. The choice is to either sell at the lower price (presumably investing in something else) or hold the bond until maturity.

I read that investors seek yield rather than coupon rates. Why is that?

I'm not sure what the context is, but investors want high yields when buying bonds (since it implies either low prices or high coupons). That yield is effectively "locked in" so long as the investor holds the bond.

If you buy a \$1,000 bond from the US Treasury, you will pay that minus the discount rate. Every day banks bid on treasury securities and the lowest discount rate wins. That means if the discount rate for that security was 2.5% on the day you bought it, Treasury will take \$975 from you. On the date of maturity, Treasury will credit you \$1,000. Your return is \$25 but it's handled a bit differently.

• US wasn't mentioned anywhere in the question. Can you generalize this answer for any bond instead of US Treasury bonds? Jan 9, 2019 at 18:58
• Unlikely since treasuries are specific to the nation in which the currency exist, and are entirely different from corporate or municipal bonds. My answer only applies to US treasuries. Jan 9, 2019 at 19:46
• US Treasuries trade daily in the secondary market, but are auctioned only once or a few times ('reopenings') per CUSIP. 'Bills' up to one year pay only at maturity and thus always auction and trade at a discount, but longer 'notes' and 'bonds' also pay semiannual coupons (unless 'stripped') and can auction and trade at either a discount or premium depending on how the coupon (sometimes set years or decades ago) compares to the market now. Jan 10, 2019 at 0:54

Bond redemption price, 1000

Bond term, 1 year

Yearly coupon, 100

Yield, 10%

Now the interest rate drops from 10% to 9.09% also meaning that the yearly coupon should drop from 100 to 90.90. But the coupon can't drop but only the bond can be repriced.

((100 - 90.90) * 1.00 year) + 1000 = repriced bond at 1009.10

Check the result as 90.90 / 1000 = 9.09% but the coupon is really 100 so the extra amount of coupon payment must add to the bond price.

Now consider 1009.10 payed for the bond and 1100 total received from the bond at redemption for 90.90 overall profit.

That's 90.90 / 1009.10 = 9.01% .

Now those are not actual bond formulas but just my own logic.