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But if one were to buy the bond later on, after some of this movement, they buy it on the secondary market and pay current face value. Let's say par value was $100, and the price has gone up so one has to pay $110. If the initial coupon was at 5%, the new 'yield to maturity' for the person paying $110 would be 4.5%, correct? When the bond comes due, does that investor get back their initial investment (at the $110 price) or do they get paid back at par value, and thus also lose 10% of their initial capital investment?

Actually the *Current yield* will be about 4.55%. The *Yield to Maturity* will be much different, depending on how much time remains until maturity. That 10% premium you pay would be spread over the remaining time to maturity, which affects the calculation. Say you have 5 years remaining to maturity. That 10% premium reduces your YTM by about 2% per year, to about 3%. That's not exact, because it's usually figured on a compound basis, conventionally semiannually or quarterly, as the bond interest payments go. Actually, as you can see, a 10% premium is a pretty big deal.

I assume the latter (because why would a bond issuer be responsible for paying back the higher value), and if that's the case, the investor has to go into that investment knowing their yield is lower and also calculating in the capital loss at the end, correct? Or does the 'yield to maturity' figure include that capital loss in the calculation?

Here, your assumption is correct. The premium you pay produces the capital loss component, and is factored into the YTM calculation.

Bill
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