Quick bond valuation question
If I have two redeemable bonds - one with say a coupon rate of 3% and another with one of 8% - why is the YTM lower for the 8% if you have spot rate of like 4.5 / 4.7 / 4.9 / 5.1.
The only thing I see is that the spot rate which I discount the future cashflows is less that the coupon - not sure how that equates to a lower YTM though?
Because the spot rate affects the YTM relatively, meaning you see a drop (or change) in YTM today or nominally. You have to allow the bond to completely cycle before the true YTM becomes effective. Here is a link to what you need in order to see this principle. "http://www.investopedia.com/exam-guide/cfa-level-1/fixed-income-investm…"
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