What is a Bond?

•A long-term debt instrument in which a borrower agrees to make payments of principal and interest, on specific dates, to the holder of the bonds.

Bond Markets

•Primarily traded in the over-the-counter (OTC) market.
•Most bonds are owned and traded among large financial institutions.
•The Wall Street Journal reports key developments in the Treasury, corporate, and municipal markets.

Key Features of a Bond

•Par value: face amount of the bond, which is paid at maturity (assume $1,000).
•Coupon interest rate: stated interest rate (generally fixed) paid by the issuer. Multiply by par value to get dollar payment of interest.
•Maturity date: years until the bond must be repaid.
•Issue date: when the bond was issued.
•Yield to maturity: rate of return earned on a bond held until maturity (also called the “promised yield”).

Effect of a Call Provision

•Allows issuer to refund the bond issue if rates decline (helps the issuer, but hurts the investor).
•Bond investors require higher yields on callable bonds.
•In many cases, callable bonds include a deferred call provision and a declining call premium.

What is a Sinking Fund?

•Provision to pay off a loan over its life rather than all at maturity.
•Similar to amortization on a term loan.
•Reduces risk to investor, shortens average maturity.
•But not good for investors if rates decline after issuance.

What is the Value of a 10 year, 10% annual coupon bond, if rd = 10%?





Last modified: Tuesday, August 14, 2018, 8:42 AM