If you purchase a bond at a discount to par value, what will happen to the yield to maturity?

When a bond is purchased at a discount to par value, the yield to maturity (YTM) increases compared to the current yield. This is primarily due to the way YTM is calculated. YTM represents the total return expected on a bond if it is held until maturity, factoring in both the annual interest payments (coupon payments) and any capital gains or losses that will occur as the bond matures.

When a bond is bought at a discount, the investor pays less than the face value of the bond. Upon maturity, the bondholder receives the full par value, meaning there is a capital gain that contributes to the overall yield. Consequently, because the investor will not only receive periodic interest payments but also benefit from this price appreciation, the yield to maturity will be higher than the current yield, which only considers the annual interest divided by the current price of the bond.

Understanding this relationship between YTM, purchase price, and current yield is crucial for investors looking to evaluate the profitability and risk associated with bond investments.