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I am trying to learn about valuation and yields for treasury bonds. For the Treasury Bond maturing on 11/15/2018, initially sold in 1988 with a 9% coupon, it states that the yield to maturity is 1.66%. Now a secondary sale with an ask price of 101.856%. Last coupon was paid 5/15/2018.

Shouldn't the yield if you bought it now be ($45-$18.56)/$1018.56 = 0.0260 as there will be the final coupon payment and face value paid at maturity? Is the quoted yield to maturity based on buying it when initially sold in 1988 and the current price?

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When you buy a coupon bond, you pay the accrued interest in addition to the market-set price. (And correspondingly when you sell you receive it.) I assume this quote would execute Aug 13 and I make that 90 days from May 15 and 94 days to Nov 15 -- although I may be off slightly since I can never remember which way the boundary days go, or if they use the settlement date.

Thus you pay a premium of $18.56 and interest of (I think) $22.01, and at maturity get interest of $45, for a net gain of $4.43 over 94 days, which annualizes (straight-line) to $16.97, on $1018.56 principal which gives yield of 1.666% which I think is 'close enough for government bonds' :-)

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  • Thank you for the response. That is very helpful. So, that ytm is for the current sale. That is what i thought, but could not calculate why. Basically, the accrued interest is withheld from the final coupon payment or is it actually paid out at the time of purchase?
    – RJM
    Aug 13, 2018 at 0:10
  • @RJM As I said you pay accrued interest when you buy and receive it when you sell. In a liquid market (which US Treasuries are, especially those with short remaining term) the same bond might easily be sold 5 or 10 or more times during one 6-month coupon period with each holder entitled to a pro-rata part of the interest, so it doesn't make sense for the issuer to try to track and pay these separately.
    – dave_thompson_085
    Aug 15, 2018 at 1:28
  • 's Thank you. I am reading a text on corporate finance and they do not go into such detail. I am early on so far and it has only shown how to calculate present value and yield to maturity. It did not describe hiw to handle secondary purchases between coupon payments. Thank you again, I really appreciate your explanation.
    – RJM
    Aug 15, 2018 at 1:32

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