Difference in coupon rate and required rate o return?

Question

I'm calculating yield to maturities and I can perform the math, but I do not understand the functions of each. I have a comprehensive test comng up.

Answer 1

Remember that the Present Value (PV) = all the cash flows discounted at the required rate of return

Coupon rate is the rate on the principle. For example, you usually have a $1,000 note bond. So, a 5% coupon would pay $50 annually (or $25 semi-annually).

Let's say you had that bond that paid 5% coupon annually over 10 years.

If the required rate of return was greater than 5%, the price of the bond today would be less than the face value. The discount is what buyers would ask for as extra yield (in addition to the coupons) to yield the rate they need.

If the required rate is equal to the coupon, then the price is equal to the face.

If the required rate is less than the coupon, the current price is at a premium over the face value. The buyers are willing to pay up, the extra money reduces their yield (when summed with the coupons) to get the to required rate.

Clear?