How do you calculate coupon rate, coupon yield, and yield to maturity for a bond after a decline in interest rates to figure out thier new values.
A firm issues a bond at par value. Shortly thereafter, interest rates fall, adn the three values (oupon rate, coupon yield, and yield to maturity) would give different results - one the highest, one the lowest, and one in-between.
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The coupon rate of a bond is fixed when the bond is issued. It does not change whether the prevailing interest rate rises or falls.
The coupon yield of a bond is given as the coupon amount divided by the price of the bond. When there is a fall in interest rates, the price of bonds increases. As a result the coupon yield decreases.
The yield to maturity of a bond increases as the interest rate falls. This is due to the fact that the discounting factor for the interest payments received each year decreases as the interest rates drop. Also, the discounted value of the price of the bond received at maturity increases. This increases the yield to maturity when interest rates fall.
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