Bonds
Bonds and Their Valuation
After reading this chapter, students should be able to:
• List the four main classifications of bonds and differentiate among them.
• Identify the key characteristics common to all bonds.
• Calculate the value of a bond with annual or semiannual interest payments.
• Explain why the market value of an outstanding fixed-rate bond will fall when interest rates rise on new bonds of equal risk, or vice versa.
• Calculate the current yield, the yield to maturity, and/or the yield to call on a bond.
• Differentiate between interest rate risk, reinvestment rate risk, and default risk.
• List major types of corporate bonds and distinguish among them.
• Explain the importance of bond ratings and list some of the criteria used to rate bonds.
• Differentiate among the following terms: Insolvent, liquidation, and reorganization.
• Read and understand the information provided on the bond market page of your newspaper
Characteristics of Bonds
A bond is a long-term contract under which a borrower (the issuer) agrees to make payments of interest and principal, on specific dates, to the holders (creditors) of the bond.
Bearer bond - Bonds that are not registered on the books of the issuer. Such bonds are held in physical form by the owner, who receives interest payments by physically detaching coupons from the bond certificate and delivering them to the paying agent.
Registered bond - A bond whose issuer records ownership and interest payments. Differs from a bearer bond, which is traded without record of ownership and whose possession is the only evidence of ownership.
Par value - Also called the maturity value or face value; the amount that an issuer agrees to pay at the maturity date.
Coupon interest rate - With bonds, notes, or other fixed income securities, the stated percentage rate of interest, usually paid twice a year (semiannually). Coupon
After reading this chapter, students should be able to:
• List the four main classifications of bonds and differentiate among them.
• Identify the key characteristics common to all bonds.
• Calculate the value of a bond with annual or semiannual interest payments.
• Explain why the market value of an outstanding fixed-rate bond will fall when interest rates rise on new bonds of equal risk, or vice versa.
• Calculate the current yield, the yield to maturity, and/or the yield to call on a bond.
• Differentiate between interest rate risk, reinvestment rate risk, and default risk.
• List major types of corporate bonds and distinguish among them.
• Explain the importance of bond ratings and list some of the criteria used to rate bonds.
• Differentiate among the following terms: Insolvent, liquidation, and reorganization.
• Read and understand the information provided on the bond market page of your newspaper
Characteristics of Bonds
A bond is a long-term contract under which a borrower (the issuer) agrees to make payments of interest and principal, on specific dates, to the holders (creditors) of the bond.
Bearer bond - Bonds that are not registered on the books of the issuer. Such bonds are held in physical form by the owner, who receives interest payments by physically detaching coupons from the bond certificate and delivering them to the paying agent.
Registered bond - A bond whose issuer records ownership and interest payments. Differs from a bearer bond, which is traded without record of ownership and whose possession is the only evidence of ownership.
Par value - Also called the maturity value or face value; the amount that an issuer agrees to pay at the maturity date.
Coupon interest rate - With bonds, notes, or other fixed income securities, the stated percentage rate of interest, usually paid twice a year (semiannually). Coupon