Bond Price and Coupon rate/ Yield

[goldski]

Dilemma


So, the higher the coupon rate the higher is the yield.

The higher the coupon rate the higher the Bond Price.

The higher the Bond Price the Lower the Yield...

Where is the flow?

 

[AndrewChang]

When you issue a bond, the coupon rate is fixed, the redemption is fixed but the yield rate is not fixed. Think about it this way, so when you buy a bond after issue for 1500 that is 1000 par value, you are getting a lower yield than if you bought it at 1000 because the coupon is fixed. While your statement the higher the coupon rate the higher the bond price and the higher the bond price the lower the yield is correct, the higher the coupon rate the higher the yield doesn't have to be correct. While coupon rate affects the value of a bond, if the coupon rate is over the required yield rate, it will sell at a premium so the high coupon rate doesn't necessarily cause a higher yield rate. While a high coupon does make it less risky so there is a correlation between yield and coupon rate, the coupon rate affects the bond price more.

 

[WilliamY]

When you issue a bond, the coupon rate is fixed, the redemption is fixed but the yield rate is not fixed. Think about it this way, so when you buy a bond after issue for 1500 that is 1000 par value, you are getting a lower yield than if you bought it at 1000 because the coupon is fixed. While your statement the higher the coupon rate the higher the bond price and the higher the bond price the lower the yield is correct, the higher the coupon rate the higher the yield doesn't have to be correct. While coupon rate affects the value of a bond, if the coupon rate is over the required yield rate, it will sell at a premium so the high coupon rate doesn't necessarily cause a higher yield rate. While a high coupon does make it less risky so there is a correlation between yield and coupon rate, the coupon rate affects the bond price more.

Ceteris paribus, the higher a bond’s coupon rate, the higher its yield. That’s because each year the bond will pay a higher percentage of its face value as interest.

 

[AndrewChang]

Ceteris paribus, if you compare two bonds, the higher a bond’s coupon rate, the higher its yield. That’s because each year the bond will pay a higher percentage of its face value as interest.

This is true but why would two exact same bonds have two different coupon rates? That is a huge arbitrage and you can just buy this bond at the higher coupon rate and sell it for a premium for no risk free profit.

 

[WilliamY]

This is true but why would two exact same bonds have two different coupon rates? That is a huge arbitrage and you can just buy this bond at the higher coupon rate and sell it for a premium for no risk free profit.

Issuers offer various coupon rates for investors with different objectives.

Arbitrage will not be present if it's priced correctly with the zero-coupon rate.

The difference in yields for same maturity bonds is attributed to the "coupon bias". Yields are merely a harmonic mean and are a rather insignificant measure of a bond return.

 

[Joy Pathak]

What Will said is right.

The coupon effect on Yield to Maturity (Journal of Finance 1977) - Caks

Check out that paper and references 1 and 7 in the paper.

 

[AndrewChang]

Issuers offer various coupon rates for investors with different objectives.

Arbitrage will not be present if it's priced correctly with the zero-coupon rate.

The difference in yields for same maturity bonds is attributed to the "coupon bias". Yields are merely a harmonic mean and are a rather insignificant measure of a bond return.

I thought you meant that even bond price will be the same.