Two Bonds w/ Different Maturities but Same Price / Face. Which has higher yield?
Can someone explain why they have the same yield? Wouldn't a longer maturity imply a higher yield to compensate for the additional risk?
Thank you!
Can someone explain why they have the same yield? Wouldn't a longer maturity imply a higher yield to compensate for the additional risk?
Thank you!
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there are many other things that could impact a bond price, like credit worthiness, place in the capital structure, embedded put/call options. however, assuming all things being equal...
2 bonds with same coupon, same price, but different maturity dates
1) as price goes below par (100), for the same price, the shorter maturity will have a higher yield 2) as price goes above par, the shorter maturity will have a lower yield 3) when the price is par (100) they will both yield the coupon, and thus have the same yield.
this is because for the same price movement, a shorter maturity bond yield moves more.
we more often refer to PV01, the price value of a 1 basis point move in yield (but the question you asked is opposite...its the yield value of a change in price...similar...but from the opposite perspective)
shorter maturity bonds have a lower PV01....a 1 basis point move in yield has a small impact on price. conversely, it takes a small move in price to create a large move in yield (for a shorter maturity bond)....2 sides of the same coin.