How would you convince your Client that a "higher" yield bond does not really give a higher yield?
Saw this question on an interview guide but had no answer.
Does it have to do with the relation between the nominal yield and the current yield? Or is it relating to YTM?
If price is significantly above par
So generally when people say yield, they mean the interest rate/coupon rate?
No. Coupon is part of it, but yield is also a function of price.
Try this link http://lmgtfy.com/?q=yield
Risk adjusted returns. Consider defaults.
I was trying to edit it because I left to go do something irl. It cant be YTM, because higher YTM is a higher YTM...
If bond trades at par its coupon = current rate =its YTM. If bond trades at a discount its YTM > current yield >coupon. If Bond trades at a premium its YTM Current rate Coupon
So when people say yield they are referring to the nominal yield, and to explain it to the client I WOULD discuss the relation between the yield the current yield?
Call provision in the Bond; look at Yield to Worst
The question seems to assume that for "yield", we're talking about roughly equivalent securities.
It's also asking "how you would convince a client", and my answer in that case would be to quickly demonstrate an example of the math involved by showing them what a yield is.
I'd ask them to name a low percentage, then show them how that is calculated. I'd then say "let's say the the bond is now trading at X discount....." and recalculate the yield to demonstrate my point. It can be visually demonstrated in under a minute.
Not only does it help their point but gives you a chance to demonstrate technical competency to the client.
Thanks. That's what I was thinking but I wanted to make sure. haha.Have a Silver banana.
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