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Questions and Answers
What is the par value of a bond?
What is the par value of a bond?
What determines the yield to maturity of a bond?
What determines the yield to maturity of a bond?
What is a bond that trades at a price higher than its par value called?
What is a bond that trades at a price higher than its par value called?
What is the main characteristic of a fixed interest bond?
What is the main characteristic of a fixed interest bond?
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What type of bond is issued by a municipality?
What type of bond is issued by a municipality?
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What is the internal rate of return of a bond also known as?
What is the internal rate of return of a bond also known as?
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What is the primary feature of a Callable bond?
What is the primary feature of a Callable bond?
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What is the main characteristic of an Indexed bond?
What is the main characteristic of an Indexed bond?
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Which type of bond is backed by a pool of mortgages?
Which type of bond is backed by a pool of mortgages?
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What is the term for a bond issued outside the country of the issuer and denominated in a foreign currency?
What is the term for a bond issued outside the country of the issuer and denominated in a foreign currency?
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What is the primary feature of a Putable bond?
What is the primary feature of a Putable bond?
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Study Notes
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).
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