Nominal Yield

If a bond is issued for $1,000 with an agreement to pay, say, $100 in interest every year, then it has an annual coupon rate of interest of 10 percent. this is also called its nominal yield ("yield" is synonymous with interest rate). the nominal yield is defined as

nominal yield = annual coupon interest payment \ face amount of the bond.

there are two other measure of return to a bond-its current yield and its yields to maturity (or effective yield).

Current Yield

Current Yield is the dollar annual interest expressed as a percentage of the current market price of the bond. Bonds are often issued (and resold) at a price different from their face value. Thus, a 6 percent bond currently selling at $900 would have a nominal yield of 6 percent ($60 divided by $1,000) but a current yield of 6.67 percent ($60 divided by $900).

thus,

the current yield = annual coupon interest payment \ the price of ponds .

## Thursday, August 13, 2009

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