Yield vs Coupon Confusion

[ENP]

Hi,

Can someone clear up my confusion with this list of bonds.

I was under the impression that the yield is the amount of the interest payment in a dollar amount divided by the price on the bond. However this rate sheet from ASB has thrown me in a bit of confusion.

https://www.asbsecurities.co.nz/rw/es/ASBSecurities/Announcements/DailyNZFixedInterest.pdf

Take for example the very top line NZ government bond maturing 15/4/2015.

The coupon is 6%
The yield is 2.78%
The price is $108.79

I would have assumed the yield would be 5.5% ($6/$108.79)

Can someone please explain? :confused:

[Xerof]

You're not taking time to maturity into account.

Google 'bond pricing' or 'yield to maturity' and you'll find plenty of examples, formulae and explanations

cheers

[Jay]

Or in simple terms you will be paid 6%p.a. from when you purchase to maturity, however as you are paying $108.79 per $100 the effective return is 2.78%

[Halebop]

Hi ENP,

Coupon is the interest payable at face value - in your example the bond has a $100 face value and pays 6% or $6 per annum.

The yield is the return you'll get paying market price on the bond but this is slightly more complex:
ASB have probably used the Yield to Maturity (YTM) method to calculate yield (google this)
The bond has an April 2015 Maturity (meaning time has an impact)
The implied settlement date is 18 February 2013 (The date the bond is purchased i.e. yield is theoretical)
It pays interest periodically (I don't know how frequently though?)
At Maturity you'll only get $100 back from the borrower (The face value)
The market price is $108.79 (Meaning you have "lost" $8.79 versus the maturity value the moment you purchase, this needs to be recouped via the coupon rate, reducing your effective yield)

While maturity does influence the calculation as Xerof suggests, in this example paying a high market price versus the maturity value is a big contributor to the yield versus coupon differential (You have to make up that $8.79 gap between market and face value)

Excel provides a YIELD function - I just had a quick play but was getting a lower yield to ASB - then again I don't know all the parameters.

[ENP]

At Maturity you'll only get $100 back from the borrower (The face value)
The market price is $108.79 (Meaning you have "lost" $8.79 versus the maturity value the moment you purchase

This makes perfect sense.

I get it now. Because you lose out the $8.79 it reduces the theoretical yield.

Thanks.