Bond Yields A 30 year Treasury bond is issued with a face va

Bond Yields. A 30 year Treasury bond is issued with a face value of $1,000, payinh interest of $60 per year. If market yields increase shortly after the T-Bond is issues, what happens to the bond’s A. Coupon? B. Price? C. Yield to maturity? D. Current Yield?

Solution

A)

Coupon rate = 6%, which remains unchanged. The coupon payments are fixed at $60 per year.

B).

When the market yield increases, the bond price will fall. The cash flows are discounted at a higher rate.

C)

At a lower price, the bond’s yield to maturity will be higher. The higher yield to maturity for the bond is commensurate with the higher yields available in the rest of the bond market.

D)

Current yield = coupon rate/bond price As the coupon rate remains the same and the bond price decreases, the current yield increases