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Par yield (or par rate) denotes in finance, the coupon rate for which the price of a bond is equal to its nominal value (or par value).[1] It is used in the design of fixed interest securities and in constructing interest rate swaps.

The par yield c for a n-year maturity fixed bond satisfies the following equation[2]

100c1+R(0,1)+100c(1+R(0,2))2++100+100c(1+R(0,n))n=100.

This can be more succinctly expressed with the prices of zero coupon bonds:

c=1Pnk=1nPk

Here R(0,m) denotes the yield (on annual interest rate basis) of an m-year zero-coupon bond, and Pm denotes the price of an m-year ZCB.

See also

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References

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  1. G. Questa: Fixed income analysis for the global financial market Chapter 7 Section 4;
  2. Martellini, Priaulet, Priaulet: Fixed-income securities, Wiley Finance, 2003