101 Concepts for the Level I Exam
Concept 82: Relationships among a Bond’s Price, Coupon Rate, Maturity, and Market Discount Rate (Yield-to-Maturity)
The yield-to-maturity is the implied market discount rate given the price of the bond.
Relationship with bond’s price
- A bond’s price moves inversely with its YTM. An increase in YTM decreases the price and a decrease in YTM increases the price of a bond.
- The relationship between a bond’s price and its YTM is convex. Percentage price change is more when discount rate goes down than when it goes up by the same amount.
Relationship with coupon rate
- A bond is priced at a premium above par value when the coupon rate is greater than the market discount rate.
- A bond is priced at a discount below par value when the coupon rate is less than the market discount rate.
- All else equal, the price of a lower-coupon bond is more volatile than the price of a higher-coupon bond.
Relationship with maturity
- All else equal, generally, the price of a longer-term bond is more volatile than the price of shorter-term bond.
- Assuming no default, premium and discount bond prices are “pulled to par” as maturity approaches.