James buys a newly issued, $1,000 face value, 10-year maturity bond with a coupon rate of 12% (coupons are semi-annual) at $1,000. What is the current yield to maturity (YTM, nominal and semi-annually compounded) of this bond

12%.

Explanation:

=>There is an inverse relationship between bond's coupon rate and yield to maturity (is nothing but the reinvestment rate per period).

=>It results inverse relation exists between bond price and bond's reinvestment rate per period too.

=>If the yield to maturity is lower than coupon rate, bonds will be issued at premium (market price more than bond's par value) as the bonds will be demanded more among the investors; For example, if coupon rate is 8% whereas the yield to maturity is 7%, bonds will be issued at price higher Than bond's par value, that is at premium.

=>Bond's yield to maturity is nothing but the market interest rate or expected return on bond by investor, It the yield to maturity is higher than coupon rate, bonds will be issued at discount (market price less than bond's par value) to attract more customers; For example, if coupon rate is 8% whereas the yield to maturity is 9%, bonds will be issued at price less than bond's par value, that is at discount.

=>If yield to maturity Is equal to coupon rate, bonds will be Issued at par obviously as both coupon rate and Investor's expected return rate are equal which Implies that bond's coupon rate exactly satisfies Investors expected return on such bonds. Therefore, as bond's per value is $1,000 and issue price is $1,000, its annual YTM will be equal to its annual coupon rate of 12%.

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