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Finance Investment Notes

In: Business and Management

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Finance 202

Alex Low – Course Notes

Chapter 10 – bond prices and yields

10.1 Bond Characteristics

Bond: A security that obligates the issure to make specific payments to the holder over time.

Face value/par value: The payment at which is made at maturity to the bond holder

Coupon rate: A bonds annual interest payment per dollar of par value

Zero coupon bonds: pays no coupons, sells at discount, provides only payment of par value at maturity.

If a bond is purchased between coupon dates the buyer must pay the seller for accrued interest.

[Formula]

Corporate Bonds: like government bonds except issued by companies.

Floating rate bonds: Coupon rates periodically reset according to specified market date.

Preference Stock: Although strictly classified as equity, it is often included in fixed income universe. Preference stock often pay a fixed dividend.

Other domestic issuers: there are other issuers of bonds. Local governments issue municipal bonds to finance local projects.

International bonds: * Foreign bonds: issued by a borrower from a country other than the one in which the bond is sold. These are dominated in the currency of the market country. * Eurobonds: different as denominated in currency (usually of the issuing country) different than that of market.

Inflation protected securities: face values change with changes in price level. There is a fixed coupon rate, the amount changes with principle.

10.2 Bond pricing:

Bond value = PV of coupons + PV of par

Bond price =

Bonds can be priced at a premium, discount, or at par. If the bond's price is higher than its par value, it will sell at a premium because its interest rate is higher than current prevailing rates. If the bond's price is lower than its par value, the bond will sell at a discount because its interest rate is lower than current…...

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