In this example X = YTM-0.10. Therefore, YTM = 0.10 + X= 0.10 + 0.0212 = 0.1212, or 12.12 percent. The use of a computer provides a precise yield to maturity of 11.82 percent. It is important to keep in mind that interpolation gives only an approximation of the exact percentage; the relationship between the two discount rates is not linear with respect to present value. However, the tighter the range of discount rates that we use in interpolation, the closer the resulting answer will be to the mathematically correct one. For example, had we used 11 and 12 percent, we would have come even closer to the "true" yield to maturity.

Behavior of Bond Prices. On the basis of an understanding of, a number of observations can be made concerning bond prices:

1. When the market required rate of return is more than the stated coupon rate, the price of the bond will be less than its face value. Such a bond is said to be selling at a discount from face value. The amount by which the face value exceeds the current price is the bond discount.

2. When the market required rate of return is less than the stated coupon rate, the price of the bond will be more than its face value. Such a bond is said to be selling at a premium over face value. The amount by which the current price exceeds the face value is the bond premium.

3. When the market required rate of return equals the stated coupon rate, the price of the bond will equal its face value. Such a bond is said to be selling at par.