
Cash Equivalents and Fixed Income Securities  Bond Yields
Measuring Yield
While the stated (nominal) interest rate on a bond might appear to be the only measure of a bond yield, it is only accurate if you buy a bond at par (or its face value) and hold it until the bond matures. However, many investors buy bonds at prices above or below par, and many sell prior to maturity.
The following measures are used to reflect these circumstances:
 Yield to Maturity  YTM
 The return based on the actual purchase price of the bond
 Takes any premium or discount over par into account and uses the actual time to maturity for the number of compounding periods
 If an investor buys a bond at a price below its par value (at a discount), then its YTM will be greater than its stated interest rate (also known as its coupon rate).
 If an investor buys a bond above its par value (at a premium), then its YTM will be lower than its coupon rate.
 If the bond was purchased at par, the yield to maturity will equal the stated coupon rate.
Example:
For $976 James Smith buys a bond with a face value of $1,000 and a 6% coupon rate. What will his yield to maturity be?
 6%
 Less than 6%
 More than 6%
 Unable to calculate based on given information
Answer: The correct answer is "c". When an investor buys a bond at a discount to its face value, the yield to maturity will exceed the coupon rate.
 Yield to Call
 Similar to YTM but uses the call date for the number of compounding periods and incorporates any call premium into the future value
 A callable bond is one that allows the issuer the right to demand the bond back from an investor prior to maturity. The investor is paid the bond's face value plus a premium to partly compensate the investor for the loss of the future coupon payments on the bond. Typically, the investor must reinvest the proceeds at a lower rate of return than the rate of return earned prior to the call.
 The YTC on a particular bond usually will be less than its yield to maturity because there are fewer coupon payments and fewer compounding periods.
 Similar to YTM but uses the call date for the number of compounding periods and incorporates any call premium into the future value
 Current Yield
 Simply, the annual income divided by the market value of the bond
 If the bond is trading at a premium, the current yield will be less than the nominal yield.
 If the bond is trading at a discount, the current yield will be greater than the nominal yield.
Current Yield = Annual Income Ã· Market Value 
Example:A bond with a $1,000 face value and a 5.5% coupon rate currently trades at $984. What is its current yield?
Current yield = $55/$984 = .056 or 5.6%.
 Real interest rate
 The rate the investor receives after inflation is taken into account; in essence, the real interest rate equals the nominal interest rate minus the inflation rate. (This equation will give you an approximate real interest rate; the precise equation is more complicated but is not needed for the Series 65 exam.)
 The inflation premium is typically higher for bonds with longer maturities.
 The rate the investor receives after inflation is taken into account; in essence, the real interest rate equals the nominal interest rate minus the inflation rate. (This equation will give you an approximate real interest rate; the precise equation is more complicated but is not needed for the Series 65 exam.)
Real interest rate = Nominal Interest Rate  Inflation Rate 
Exam Tips and Tricks Consider this sample question: 
 A client buys a DEF 10% bond at 105. The bond matures in 10 years. What is the current yield?
 10.17%
 9.52%
 9.69%
 9.13%
Yield CurvesThe correct answer is "b", since current yield is found by dividing the annual interest payment (in this case 10% or $100) by the current market price (in this case 105% or $1,050). Note that bond par values are most often $1,000. Whether or not you know this value, it will not affect the answer, since you can merely divide the coupon in % terms by the price in % terms.

Bonds & Fixed Income
Comparing Yield To Maturity And The Coupon Rate
Investors base investing decisions and strategies on yield to maturity more so than coupon rates. 
Bonds & Fixed Income
Simple Math for FixedCoupon Corporate Bonds
A guide to help to understand the simple math behind fixedcoupon corporate bonds. 
Investing
Understanding the Different Types of Bond Yields
Any investor, private or institutional, should be aware of the diverse types and calculations of bond yields before an actual investment. 
Bonds & Fixed Income
How To Evaluate Bond Performance
Learn about how investors should evaluate bond performance. See how the maturity of a bond can impact its exposure to interest rate risk. 
Bonds & Fixed Income
Bond Yields: Current Yield And YTM
A bond's current yield, also called "bond yield," is the interest it pays annually divided by the bond's price. A stock's current yield, also called "dividend yield," is the sum of its annual ... 
Bonds & Fixed Income
How Do I Calculate Yield To Maturity Of A Zero Coupon Bond?
Yield to maturity is a basic investing concept used by investors to compare bonds of different coupons and times until maturity. 
Investing Basics
What is a Premium Bond?
A premium bond is one that trades above its face or nominal amount. 
Bonds & Fixed Income
How Does A Bondâ€™s Coupon Interest Rate Affect Its Price?
All bonds come with a coupon interest rate, which is the fixed annual interest a bond pays. 
Investing Basics
Explaining the Coupon Rate
Coupon rate is the stated interest rate on a fixed income security. 
Bonds & Fixed Income
How Bond Prices and Yields Work
Understanding bond prices and yields can help any investor in any market.

Yield To Maturity (YTM)
The total return anticipated on a bond if the bond is held until ... 
Discount Bond
A bond that is issued for less than its par (or face) value, ... 
Bond Yield
The amount of return an investor will realize on a bond. Several ... 
Premium Bond
1) A bond that is trading above its par value. A bond will trade ... 
Coupon
The annual interest rate paid on a bond, expressed as a percentage ... 
Coupon Rate
The yield paid by a fixed income security. A fixed income security's ...

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