Bonds

What is a bond?

A promise or an agreement to make payments in the future, they are used by corporations and different branches of the government to borrow money. Bonds are used as a debt instrument

What is a coupon bond? Can you calculate its coupon rate, coupon payment and its price?

A very common bond where one makes annual coupon payments on the percentage of the bond’s face value

A promise from the issuer of the bond, to make a series of periodic interest payments called coupon payments, plus a principal payment at maturity

A debt instrument that requires multiple payments of interest on a regular basis, such as semiannually or annually, and a payment of the face value at maturity

Face Value - the amount to be repaid by the bond issuer (the borrower) at maturity

Maturity - the length of time before the bond expires and the issuer makes the face value payment to the buyer

Coupon Rate

Coupon Payment / Face Value

The coupon rate is the value of the coupon expressed as a percentage of the face value of the bond

Coupon Payment

Coupon Rate x Face Value

The coupon is the annual fixed dollar amount of interest paid by the issuer of the bond to the buyer

Price

Face Value/(1+i)^n + Coupon Payment/(1+i)^n

What is a consol? Can you calculate its price?

A security that makes annual interest payments (at a constant interest) forever

Consol Price

Annual Payment / i

Makes periodic/annual interest payments forever, never repaying the principal that was borrowed

What is a zero-coupon bond?

A bond with a 0% coupon rate

A type of bond that has a 0% coupon rate, therefore there are no coupon payments

Example: Treasury Bills

Be sure that you can calculate yield to maturity, current yield and holding period return

Yield to Maturity

“Interest to maturity”, interest earned if the bond is held until it is mature

Price = Face Value/(1+i)^n + Coupon Payment/(1+i)^n

The interest rate that makes the