Exploring the function of bonds in corporate financing, this overview discusses their essential characteristics, such as face value, coupon rate, and maturity date. It delves into the varieties of bonds available, including government and corporate bonds, and examines the inverse relationship between bond prices and interest rates. The text also highlights the importance of bond features for investment analysis and the mechanics of bond trading and valuation.
Show More
Bonds represent a loan made by an investor to a borrower, with the investor receiving interest payments and the return of the principal upon maturity
Principal and Coupon Rate
The principal is the amount received upon maturity, while the coupon rate is the interest rate paid to the bondholder
Maturity Date
The maturity date is the agreed-upon time when the issuer must repay the principal
Bond Prices and Market Fluctuations
Bond prices can change due to factors such as interest rates, credit quality, and time to maturity
Government Bonds
Government bonds are low-risk investments issued by national governments, with examples including U.S. Treasury bonds and Japanese Government Bonds
Corporate Bonds
Corporate bonds present a higher risk and potential return, with the credit rating of the issuing company being a crucial factor
As interest rates rise, bond prices typically decline, and vice versa, due to the time value of money principle
The duration of a bond affects its sensitivity to interest rate changes, while the yield to maturity is a measure of its total expected return
Bond investors must consider the face value, coupon rate, maturity date, and issuer identity when analyzing bonds for investment purposes
Bonds can be bought and sold on secondary markets, with prices being affected by the bond's yield and whether it is trading at a premium or discount
The yield to maturity is an important measure for assessing a bond's potential return, and the bond pricing formula takes into account various factors such as the bond's current market price and coupon payments
00
Bond Definition
A bond is a debt security, representing a loan from an investor to a borrower like a corporation or government.
01
Bond Coupons
Coupons are periodic interest payments made to the bondholder during the term of the bond.
02
Bond Maturity Date
The maturity date is when the bond issuer must repay the bond's principal to the investor.
