2.6 Bond Yields & The Seesaw
Comparing Nominal, Current, YTM, and YTC across discount and premium bonds using the bond teeter-totter is heavily tested.
Key FINRA Exam Takeaways
- Current Yield (CY) = Annual Coupon Interest ÷ Current Market Price.
- Yield to Maturity (YTM): Total annualized return if held to maturity, including interest and capital gain/loss.
- Discount Bond (lowest to highest): Nominal < Current Yield < YTM < YTC.
- Premium Bond (lowest to highest): YTC < YTM < Current Yield < Nominal.
- At Par: Nominal = Current Yield = YTM = YTC.
| Pricing Condition | Lowest Yield | Second | Third | Highest Yield |
|---|---|---|---|---|
| Discount Bond | Nominal (Coupon) | Current Yield | Yield to Maturity | Yield to Call |
| Par Bond | All Equal | All Equal | All Equal | All Equal |
| Premium Bond | Yield to Call | Yield to Maturity | Current Yield | Nominal (Coupon) |
Interactive Knowledge Checkpoint • Section 2.6
A bond trading at a discount price of $950 has a 5% nominal coupon. Which of the following statements regarding its yields is TRUE?