At the end of the 5 years one will have collected $500 in interest, and "given up" $200 in face value, for a net of $300.I tried to solve for Yield to Maturity in my head, and I get 5%.5% of $1,200 is $60.$60/year for five years gives $300.Which is how it actually works out.I think the last line is your issue. You don't actually get $60 / year. Think of cash flow which is what dictates the value of any investment.Time = 0 -- you pay out $1200Year 1 - 4 -- you get $100Year 5 -- you get your final payment + $1000So you get 500 in interest as you said, and then lose $200, but you can think of that as being more than 5% because you get the $500 in cash (on average) before you lose the $200 (which only happens at the end).Money next year is worth more than money in 5 years, and that is why the YTM (which use an implied time value of money) is >5%.Hope that makes sense. If you want a thought experiment, think of the following choices:1) You can spend $1200 to buy the bond you mentioned.2) You can spend $1200 to buy a 5% coupon $1200 face value bond.Which would you rather buy and why? YTM is simply trying to make that choice mathematical.Ben
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