Expert: Doug Ingram - 8/27/2007

Question
What does it mean to purchase a 10%bond with a 9%yield to maturity and how is it calculated?

Answer
It means the bond you are buying pays a 10% coupon and is more valuable because new comparable bonds are only paying 9%.
For example:  
If you pay 1% more for a 10% one-year bond (roughly a 101 price), you will earn the same return as someone paying 100 cents on the dollar for a 9% bond.   
100 + 10 - 1% premium is still 109 at maturity.
100 + 9 = 109 at maturity for a 9% coupon.  
The calculations past one year become complex with coupon payments each being discounted to their expected date - especially since most bonds pay 2 coupons a year.
The real calculation for one year would be:
(100 + 10%{coupon])/(1+.09[yield])^1[year] = 100.9174
There are many detailed examples listed among my answers.