Saturday, July 24, 2010

Why is a yield on a coupon bond less than a zero coupon bond if interest rates are increasing?

The answer said like the yield is an average of the spot rates. But can someone give me a more explicit explanation. I am really confused. Suppose these were like treasury bonds. and the maturity of both bonds are the same year.Why is a yield on a coupon bond less than a zero coupon bond if interest rates are increasing?
Interest is the rate that you get for the use of your money. On a Zero coupon bond the interest never change, you have little at risk.





The interest in the market changes and the price of the bond changes with the interest in the market.





If a bond is sold at 6% interest. The Yield will drop if interest rates raise. All bonds have a face value when issued of $1,000.





The bond above will be worth $750 at 9% interest market and $1,250 at 4% interest market. If interest rates go high It is best to buy low interest bonds, they are purchased at a fraction of the face value. Then if the interest rate falls, you will benefit on the raising Yield and see no loss in the interest on your original investment.

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