Current Yield

Bond prices trade in points, where 100 represents maturity value, or par. The current yield is the interest rate paid on the bond, also called the coupon rate. Dividing the bond price by the coupon rate yields the current yield, an approximation of the yield to maturity. Preferred stocks do not have a stated maturity, otherwise they would be considered a bond. A preferred stock’s current yield is the sum of the stated annual dividend divided by the current value of the preferred stock. Preferred stock trades in dollars. Maturity values of $25, $50, and $100 are common prices for publicly traded preferred stock.

Yield to Maturity

Missed Coupon Payment

A bond that fails to make an interest payment when due can be considered in default. Some bond agreements allow for an additional period of time, usually no more than 10 days, for the deficiency to be cured and the investor made whole. Valuation of such bonds quickly reduces the creditworthiness of a bond, and the accrued interest is added to the principal due. Preferred stock may be issued as cumulative preferred, meaning it is not a default when interest payments are not made on time. They accrue interest like a bond, and missed interest must be paid before any stock dividends can be paid.

General Pricing Considerations

References

Resources

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