Investing - Theory, News & General • basic question on Treasury yield

Two-year Treasuries (and all notes/bonds) pay interest every six months. This is half of the stated total interest rate.

Yes, but not half the Yield to Maturity.

So if a UST pays a 4% coupon and is priced at $90.

The coupon paid every 6 months is 2% ie $2 for every $100 face value of bonds.

But the YTM calculation includes the $10 capital gain arising from the redemption of the bond at maturity at a price of $100.

So if the bond is yielding 4.5%, say, then it is still paying $2 coupon every 6 months, but the expected return to the holder is 4.5% pa.

I said the stated interest rate and I meant the official coupon (and, by the way, the most recent 2 year Treasury auctioned with a coupon of 4 7/8% or rounded off 4.9% as the OP stated). So your example for YTM is not very useful.

I was trying to clarify what you were saying for the Original Poster -- there's a lot of confusion in bond terms in finance, for non-specialists.

"stated interest rate" = Coupon Rate. It might not have been clear whether you meant "stated interest rate"= Yield to Maturity.

I deliberately used a wider discrepancy to illustrate the point - about the difference between Coupon Rate and YTM.

We can reasonably disagree whether you were being clear, but I should have stated explicitly that I wasn't correcting you (I *thought* that was what you meant) but clarifying for the OP.

Yes

It does make a fairly large practical difference in outcome when one has bought a bond at other than the face value. It is also not a negligible concern that for marketable bonds the price the bond holder can get at any time except maturity is variable. There is an additional puzzle regarding how to talk about bond return when interest payments are made but by definition do not reinvest in the bond paying those interest payments. As a result you have coupon interest rates, you have yield, and you have return, all being a little, even a lot, different.

I think it is important to be constantly clear that bonds are not interest bearing cash deposits at a bank but rather something else that is a little more complicated. This complication can be convoluted further in the case of a bond fund, these things being popular topics of consternation on the forum these days.

Statistics: Posted by dbr — Fri May 03, 2024 8:14 am — Replies 8 — Views 900

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