Par yield: Difference between revisions
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If we know the par yield, we can calculate both the [[zero coupon yield]] and the [[forward yield]] for the same maturities and risk class. | If we know the par yield, we can calculate both the [[zero coupon yield]] and the [[forward yield]] for the same maturities and risk class. | ||
This is illustrated on the page [[Converting from par rates]]. | |||
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* [[Positive yield curve]] | * [[Positive yield curve]] | ||
* [[Negative yield curve]] | * [[Negative yield curve]] | ||
* [[Converting from par rates]] | |||
Revision as of 09:27, 15 November 2015
Today’s market yield on a coupon paying bond trading at par and redeemable at par
= the fixed coupon rate payable on such a ‘par bond’.
Example
The par yield for the maturity 0-3 periods is 1.90% per period.
This means that a deposit of £1,000,000 at Time 0 periods on these terms would return:
- Interest at a rate of 1.90% per period on the original £1,000,000, at Times 1, 2 and 3 periods, and
- The principal of £1,000,000 at Time 3 periods
The interest payments will be £1,000,000 x 0.019 = £19,000 per period
The total repaid at Time 3 periods will be: principal £1,000,000 + £19,000 interest = £1,019,000.
An application of par yields is the pricing of new coupon paying bonds.
The par yield is known as the Par rate, Swap rate or Swap yield.
Conversion
If we know the par yield, we can calculate both the zero coupon yield and the forward yield for the same maturities and risk class.
This is illustrated on the page Converting from par rates.
