Approximate
formula for yield-to-maturity
nIf a bond is selling at par, yield = coupon rate. If the bond sells at a discount, yield
> coupon rate. Hence the following
approximation:
n
If the bond
sells at par, the approximation is exact. If it
sells at a discount, the second term in the
numerator is positive, and the approximation is greater than the coupon rate as desired.