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Why is the yield to maturity (YTM) of a discount bond greater than the bond's current yield?
The yield to maturity (YTM) of a discount bond is greater than the bond's current yield because the YTM takes into account the total return an investor would receive if they hold the bond until maturity, including the capital gain from buying the bond at a discount. The current yield only considers the annual interest payments relative to the bond's current price, without factoring in the potential gain from the bond reaching its full face value at maturity.
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How do investors make money on zero-coupon bonds?
The bond sells at a discount from its face value--sometimes a BIG discount. At the date of maturity, the bond will give you the full face value.
How do bondholders get a return on zero coupon bonds?
Zero coupon bonds do not pay interest and are therefore sold at a steep discount to face value depending on the maturity date of the bond. Due to the time value of money, the discount on a 30 year zero coupon bond will be much greater than on a 10 year zero coupon bond. At maturity bondholders will receive the full face value of the bond which provides bondholders a return. For example, a 30 year zero coupon bond with a face value of $1,000 and sold for $500 would return a $500 profit after 30 years. Holders of zero coupon bonds can sell the bonds at any time before maturity. If an investor bought zero coupon bonds prior to a steep drop in interest rates, the value of the zero coupon bonds would increase and could be sold at a profit.
Do bonds have a fixed maturity?
no
Whether the discount bonds are a bargain?
Discount bonds can be considered a bargain if they are purchased below their face value and the investor believes that the bond will appreciate in value as it approaches maturity. This type of bond can offer higher yields compared to similar bonds sold at par, making them attractive, especially in a declining interest rate environment. However, the perceived bargain depends on the issuer's creditworthiness and market conditions, as potential risks may offset the benefits of the discount. Ultimately, careful analysis is essential to determine if a discount bond is a worthwhile investment.
What does it mean when bonds are issued at a discount?
When a bond is issued at a discount, it is issued for a price less than par (face value). For example, if you were to purchase a bond with a face value of one thousand dollars for nine-hundred and eighty dollars, you bought the bonds at a discount because you purchased it for less than the bond will pay out at maturity. To calculate the 98, you would divide the purchase price by the par value.
Compute the current price of the bonds if the present yield to maturity is?
Compute the current price of the bond if percent yield to maturity is 7%
How do investors make money on zero coupon bonds?
The bond sells at a discount from its face value--sometimes a BIG discount. At the date of maturity, the bond will give you the full face value.
How do investors make money on zero-coupon bonds?
The bond sells at a discount from its face value--sometimes a BIG discount. At the date of maturity, the bond will give you the full face value.
How do bondholders get a return on zero coupon bonds?
Zero coupon bonds do not pay interest and are therefore sold at a steep discount to face value depending on the maturity date of the bond. Due to the time value of money, the discount on a 30 year zero coupon bond will be much greater than on a 10 year zero coupon bond. At maturity bondholders will receive the full face value of the bond which provides bondholders a return. For example, a 30 year zero coupon bond with a face value of $1,000 and sold for $500 would return a $500 profit after 30 years. Holders of zero coupon bonds can sell the bonds at any time before maturity. If an investor bought zero coupon bonds prior to a steep drop in interest rates, the value of the zero coupon bonds would increase and could be sold at a profit.
What is likely to happen to yield to maturity on bonds in the marketplace if inflationary expectations increase?
The prices of bonds will fall and yields to maturity (or call date) will rise, since investors will require greater yields on their investments to offset the expected increase in inflation.
When a bonds yield to maturity is greater than the bonds coupon rate the bond?
When the yield of a bond exceeds it coupon rate, the price will be below 'par' which is usually $100.
Do bonds have a fixed maturity?
no
Whether the discount bonds are a bargain?
Discount bonds can be considered a bargain if they are purchased below their face value and the investor believes that the bond will appreciate in value as it approaches maturity. This type of bond can offer higher yields compared to similar bonds sold at par, making them attractive, especially in a declining interest rate environment. However, the perceived bargain depends on the issuer's creditworthiness and market conditions, as potential risks may offset the benefits of the discount. Ultimately, careful analysis is essential to determine if a discount bond is a worthwhile investment.
What happens when a yield to maturity is less than the yield to call?
The issuer will call the bonds and issue new bonds to the maturity date.
What does it mean when bonds are issued at a discount?
When a bond is issued at a discount, it is issued for a price less than par (face value). For example, if you were to purchase a bond with a face value of one thousand dollars for nine-hundred and eighty dollars, you bought the bonds at a discount because you purchased it for less than the bond will pay out at maturity. To calculate the 98, you would divide the purchase price by the par value.
True or false A corporation that issues bonds at a discount will recognize interest expense at a rate which is greater than the market interest rate?
True
How long does it take for bonds to reach full maturity?
Different bonds have different maturity dates. Additionally, there are different type of bonds, some provide interest based on the face value, and some provide the face value upon maturity.
