Chapter 6 - Bonds

CPN

Coupon Rate X Face Value / Number of coupon payments per year

Maturity date

Final repayment date of a bond.

There are only two cash flows if we purchase and hold a zero-coupon bond.

First, we pay the bond's current market price at the time we make the purchase. Second, at the maturity date, we receive the bond's face value.

Interest Payment

a payment amount determined by the interest rate on an account

Bond is

a security sold by governments and corporations to raise money from investors today in exchange for a promised future payment.

Zero Coupon bonds

bonds without coupons -The only cash payment an investor in a zero-coupon bond receives is the face value of the bond on the maturity date.

In addition to the face value some bonds also promise additional payments called

coupons

Zero coupon bonds always trade at a

discount (a price lower than the face value), so they are also called pure discount bonds

We can find the rate of return of an investment opportunity as the

discount rate that equates the present value of the investment to its costs.

Bond Certificate

indicates the amounts and dates of all payments to be made.

Coupon Payment (CPN)

interest payments on the bond

The present value of a future cash flow is less than the cash flow itself. As a result,

prior to its maturity date, the price of a zero coupon bond is always less than its face value.

The yield to maturity for a zero coupon is the

return you will earn as an investor by buying the bond at its current market price,holding the bond to maturity, and receiving the promised face value payment.

Coupon rate

the amount of each coupon payment of a bond. -Expressed as an APR, is set by the issuer and stated on the bond certificate.

The YTM of a bond is

the discount rate that sets the present value of the promised bond payments equal to the current market price of the bond.

Face Value (a.k.a par value, principal amount) is

the notional amount of a bond used to compute its interest payments. The face value of the bond is generally due at the bond's maturity.

Coupons

the promised interest payments of a bond, paid periodically until the maturity date of the bond.

Coupon bond

the rate of return is the discount rate at which the present value of all future cash flows from the bond equals the price of the bond.

Yield to Maturity (YTM)

the rate of return of an investment

Term

the time remaining until the final repayment date of a bond.

Treasury Bills

zero coupon bonds, issued by the U.S government, with a maturity of up to one year.