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Bond Definition

• A bond is a financial instrument where the issuer is obliged to pay the holder the par value and coupons (interest) if applicable.

Bond Characteristics

• A bond has a par value (face value) and a maturity date.
• It has a coupon rate, which is the rate of interest paid periodically.
• The clean price is the price expressed as a percentage of the par value, excluding accrued interest.
• The dirty price is the price paid for the bond, including accrued interest.
• The dirty price can be calculated by multiplying the clean price by the par value and adding accrued interest.

Bond Types

• Discount bond: A bond with a clean price lower than its par value.
• Premium bond: A bond with a clean price higher than its par value.
• Bond at par: A bond with a clean price equal to its par value.

Yield to Maturity (YTM)

• YTM is calculated as the Internal Rate of Return (IRR) and is the solution to an equation.
• YTM depends on the level of interest rates on the financial market and the credit risk of the issuer.

Bond Classification

• Treasury bond (T-bond, T-note): Issued by the government.
• Municipal bond: Issued by local governments or municipalities.
• Corporate bond: Issued by companies.
• Bank bond: Issued by banks.

Bond Classification by Interest

• Fixed interest bond: A bond with a fixed coupon rate.
• Floating rate bond: A bond with a coupon rate that changes periodically based on a reference rate (e.g. Treasury bill yield, Interbank loan rate).
• Zero-coupon bond: A bond that does not make periodic interest payments.
• Indexed bond: A bond with a coupon rate that changes based on a specific index.

Bonds with Embedded Rights

• Callable bond: A bond that allows the issuer to buy it back before maturity.
• Putable bond: A bond that allows the holder to sell it back before maturity.
• Convertible bond: A bond that allows the holder to convert it into another financial instrument (e.g. stock).

Callable and Putable Bonds

• Callable bonds are used with fixed interest bonds and falling interest rates.
• Putable bonds are used with fixed interest bonds and rising interest rates.

Convertible Bonds

• A convertible bond allows the holder to convert the bond into another financial instrument using a determined conversion ratio (e.g. 10 shares for one bond).

Bonds Backed by Other Assets

• ABS (Asset Backed Securities): Bonds backed by a pool of assets.
• MBS (Mortgage Backed Securities): Bonds backed by mortgages.
• Covered bonds: Bonds backed by a pool of assets.

Foreign Bonds

• Eurobond (Euronote): A bond issued outside the country of the issuer and denominated in a foreign currency.
• Foreign bond: A bond issued by a foreign issuer and sold in the home country (e.g. Yankee, Bulldog, Rembrandt, Matador, Samurai).