Bond Price and Yield Relationships
Discount bond: coupon < CY < YTM < YTC. Premium bond: the reverse.
What is Bond Price and Yield Relationships?
Prices and yields move inversely. A bond at a discount has a coupon below market rates, so current yield exceeds the coupon, yield to maturity exceeds current yield (you also gain the discount), and yield to call is higher still (you gain it sooner). A bond at a premium reverses every inequality. At par, all four are equal.
Bond Price and Yield Relationships: a worked example
5% coupon at $900: coupon 5.0% < current yield 5.6% < YTM < YTC. 5% coupon at $1,100: coupon 5.0% > current yield 4.5% > YTM > YTC.
More terms in Bonds & Cash Equivalents
Certificate of Deposit (CD)
A bank time deposit paying a fixed rate for a fixed term, FDIC insured.
Commercial Paper
Unsecured short-term corporate debt, 270 days or less.
Treasury Inflation-Protected Securities (TIPS)
Treasuries whose principal adjusts with the CPI.
Zero-Coupon Bond
Sold at a deep discount, pays no interest, matures at par.
Asset-Backed Securities (ABS / MBS)
Bonds backed by pools of loans - mortgages, auto loans, credit cards.
General Obligation (GO) Bond
A municipal bond backed by the issuer's full faith, credit, and taxing power.
Revenue Bond
A municipal bond repaid only from the revenue of a specific project.
Insured Municipal Bond
A muni with third-party insurance guaranteeing principal and interest.