Table II on page 15 shows that a five-year, 6 percent Treasury in a 5 percent market is worth 104.38. The owner of the bond can hold the bond and earn 6 percent per year until the bond matures at par, or she can sell the bond now for an immediate 4.38 percent profit.
One way to look at these two alternatives is to look at the take-out yield, or the yield the owner actually makes by holding the 6 percent bond to maturity. It appears that the owner is making 6 percent per year; however, the owner will lose the 4.38 percent premium if she holds the bond until it matures at par. If the 4.38 percent premium were to be amortized over the life of the five-year, 6 percent bond, the effective yield, or take-out yield would be 5 percent, the same yield that the owner would get by investing in a brand new five-year bond in the current 5 percent market.
Of course, the 4.38 percent premium is not actually amortized since the bond is owned at par. However, the 4. …