In order for the coupon rate, current yield, and yield to maturity to be the same, the bond's price upon purchase must be equal to its par value.
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- Difference Between Coupon vs Yield
- Coupon vs Yield | Top 5 Differences (with Infographics)
- Coupon Bond Valuation Using Yield to Maturity: How Wrong is It?
- Calculator Tutorials
- Bond Yield to Maturity Calculator
We can call this the federal taxable equivalent yield, but note that if you live in the municipality of the bond issuer, then the bond may be free of state and local taxes as well.
Difference Between Coupon vs Yield
To take in consideration all taxes saved, the above formula can be extended for any tax situation by simply adding up the percentages to arrive at a composite tax bracket and use that in the above equation to get the tax-free yield. A tax-free municipal bond yielding 6. Thus, a corporate bond that is taxable by the federal, state and local government would have to pay 4. Note, also, that U. Treasuries are considered the safest investment, so the corporate bond would have to pay a little more—even if it had the highest credit rating—than the Treasury, to compensate the investor for the additional risk.
The lower the credit rating of the corporate bond, the greater the interest the corporate bond would have to pay to entice investors away from safe Treasuries, which are considered risk-free investments.
Coupon vs Yield | Top 5 Differences (with Infographics)
If an investor buys a bond in the secondary market and pays a price different from par value, then not only will the current yield differ from the nominal yield, but there will be a gain or loss when the bond matures and the bondholder receives the par value of the bond. Like the calculation for current yield, yield to maturity and other yields based on the purchase price of the bond in the secondary market is based on the clean bond price , excluding accrued interest. If the investor holds the bond until maturity, he will lose money if he paid a premium for the bond, or he will earn money if it was bought at a discount.