Bond Fundamentals and Pricing › Practical Example: Comparing Bond Investments
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Consider two bonds with the same face value, maturity, and semiannual payment convention. We will compare their promised-payment yields, rather than infer a complete relative-value recommendation from coupon and price alone:
- Bond A: 5-year maturity, 4% coupon, priced at $950
- Bond B: 5-year maturity, 6% coupon, priced at $1,040
# Bond A: 5-year, 4% coupon at $950
ytm_a = yield_to_maturity(950, 1000, 0.04, 5)
# Bond B: 5-year, 6% coupon at $1,040
ytm_b = yield_to_maturity(1040, 1000, 0.06, 5)
# Calculate total cash flows
total_cf_a = 40 * 5 + 1000 # 5 years of $40 coupons + face value
total_cf_b = 60 * 5 + 1000 # 5 years of $60 coupons + face value
# Current yields (annual coupon / price)
current_yield_a = 40 / 950
current_yield_b = 60 / 1040Bond Comparison Analysis ======================================================= Metric Bond A Bond B ------------------------------------------------------- Coupon Rate 4.00% 6.00% Price $950.00 $1,040.00 Current Yield 4.21 % 5.77 % Yield to Maturity 5.15 % 5.08 % Total Cash Flows $1,200 $1,300 -------------------------------------------------------
Bond A's YTM is about 5.15%, compared with 5.08% for Bond B under the same semiannual quote convention. The discount on Bond A contributes to its yield, while Bond B pays larger coupons but is purchased above par. These figures compare promised-payment IRRs; deciding which is better value also requires comparable credit, options, liquidity, taxes, costs, and investment objectives.
The current yield (annual coupon divided by price) can be misleading because it ignores price appreciation for discount bonds and price depreciation for premium bonds.