How is the yield to maturity at 9% when somewone bought a 10% bond??

Question

A coworker bought a 10% bond, but her broker said that the bond had a 9% Yield to Maturity. How is that possible??

Answer 1

The underlying value of the bond has gone up.

The 10% refers to the interest rate at issue. the price of the bonds fluctuate. when interest rates go down, people are willing to pay more for a 10% return.

If the initial price of the bond was $100 for $10 per year in income and the bond then traded up to $110 for a 10% income of the initial $100, you would pay $110 for $10 of income...or near a 9% return. This is how a 10% bond pays 9%.

Answer 2

Your co-worker bought this bond at a premium which is to say they bought it at a higher price than the face value. If the bond was originally for $1000 and they paid $1100 dollars then the bond would pay 9% to maturity. That may sound good but on the other hand they probally could sell it for around 2000 dollars in todays market. That of course is  if the bond has a good rating. I my self would hold on to it as I suspect that interest rates are going to fall further. But that again is depends if it has a good rating.