Par yield

From ACT Wiki
Revision as of 09:27, 15 November 2015 by imported>Doug Williamson (Link with Converting from par rates page.)
Jump to navigationJump to search

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.


See also