Par yield

Today’s market yield on a coupon paying bond trading at par and redeemable at par

= the fixed coupon rate payable on such a ‘par bond’.

Example

The par yield for the maturity 0-3 periods is 1.90% per period.

This means that a deposit of £1,000,000 at Time 0 periods on these terms would return:

Interest at a rate of 1.90% per period on the original £1,000,000, at Times 1, 2 and 3 periods, and
The principal of £1,000,000 at Time 3 periods

The interest payments will be £1,000,000 x 0.019 = £19,000 per period

The total repaid at Time 3 periods will be: principal £1,000,000 + £19,000 interest = £1,019,000.

An application of par yields is the pricing of new coupon paying bonds.

The par yield is known as the Par rate, Swap rate or Swap yield.

See also