Compare these examples with those in Finance[levelcoupon] I hold a bond with face value of 1000 U with an annual coupon rate of 12%. The coupon is paid twice yearly. The maturity is in 3 years. What is the yield to maturity of the bond, compounded semi-annually given that its present value is 1050.75 U
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There are 6 periods of half a year until maturity.
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Yield is 5% per half year, therefore it is
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10% per year. If the present value is the same as the face value
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In other words, the yield is identical to the coupon rate when the bond is valued at par. (Remember that the extra factor of 2 is to convert the semi-annual yield to annual yield).
Now let the present value decline to less than face.
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This example shows that the yield must increase when the value of the bond declines.
