Required yield is the minimum yield investors require before making an investment of a given level of risk.  The required yield of any alternative investment is compared to the required yield of comparable investments.  A comparable investment is a financial instrument that is of the same credit quality and maturity and otherwise has the same features as the reference instrument.  Unless the yield equals or exceeds the required yield, the alternative investment is unacceptable.  A difference between a bond’s par value and its market price will exist whenever the bond’s coupon differs from the required yield for comparable investments.

When a bond’s coupon rate is higher than its required yield to maturity, it will sell at a premium over its par value.  A bond trading a premium is a premium bond, above 100.  Investors will be attracted to a bond that pays a coupon rate greater than the required yield on comparable bonds and will bid up the bond’s price.

When a bond’s coupon rate is lower than its required yield to maturity, the bond will sell at a discount from its par value.  A bond so trading is a discount bond, below 100.  Investors will not be interested in a bond bearing a coupon less than the required yield until the bond’s price falls to the point where it returns the required yield.

If a bond’s coupon rate equals the required yield to maturity, it will sell at par.  Such bonds are par bonds and trade at 100.

Yield Relationships
Price Price Coupon
Par Bond = 100 = RRR
Discount Bond < 100 < RRR
Premium Bond > 100 > RRR

Related Items