I'm reading Moorad Choudhry's book "Advanced Fixed Income Analysis"
The first chapter briefly touches on the coupon effect which I understand from other sources is the effect of pricing an annuity (the coupons) and a zero-coupon bond (the repayment of the notional), and so in an upward sloping curve the higher coupon bond will have a lower yield. But I'm not sure I understand the below (from section 1.2.3), and I can't find other sources for this type of analysis.
One method used to identify relative value is to quantify the coupon effect on the yields of bonds. The relationship between yield and coupon is given by (1.2):
$ rm = rm_P + c \cdotp max(C_{PD} - rm_P,0) + d \cdotp min(C_{PD} - rm_P,0) $ (1.2)
where
$ rm $ is the yield on the bond being analysed
$ rm_P $ is the yield on the par bond of specified duration
$ C_{PD} $ is the coupon on an arbitrary bond of similar duration to the part [sic] bond
and $ c $ and $d$ are coefficients. The coefficient $c$ reflects the effect of a high coupon on the yield of a bond. If we consider a case where the coupon rate exceeds the yield on the similar-duration par bond ($C_{PD} > rm_P$), (1.2) reduces to (1.3):
$ rm = rm_P + c \cdotp (C_{PD} - rm_P) $. (1.3)
Equation (1.3) specifies the spread between the yield on a high coupon bond and the yield on a par bond as linear function of the spread between the first bond's coupon and the yield and coupon of the part bond.
Is anyone better able to explain what I am looking at? Or provide a better source?
Thanks