Bonds and Fixed Income Securities
• What is a bond?
– A Bond is the basic fixed income security that obligates
the issuer to make specified interest and principal
payments to the holder on specified dates
• Three key characteristics of bonds
– The bond coupon
– Par value of the bond
– Maturity or term of the bond
• Characteristics of the Bond Market
– WSJ listing
– Listed, but sold through dealers
– Market is “thin”
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Types of Bonds
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Pure Discount or Zero Coupon Bonds –
Coupon Bonds –
Perpetual Bonds –
Self Amortizing Bonds –
Convertible Bonds –
Putt-able Bonds –
Floating Rate Bonds –
Foreign Bonds –
Eurobonds –
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Who Issues Bonds?
• The Federal Government
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Treasury bills
Treasury notes
Treasury bonds
Treasury strips
• Agency Bonds
– Mortgage backed bonds
• Municipal Bonds
• Corporate Bonds
– Secured bonds
– Debentures
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Bond Pricing
• Bond Pricing – price is based on the present value
of the stream of income to the bondholder. There
are two streams on income, the coupon payments
and the par value of the bond at maturity
Bond Value = PV of coupon payments + PV of Par Value
• Assume one market interest rate for all periods
Discount rate = real risk free rate + inflation factor + risk
premium
(see bond calculator example)
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Bond Yields Defined
• Current Yield
• Yield to Maturity
• Bond Equivalent Yield
• Effective Annual Rate
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Bond Yields – An Example
• Consider the following bond:
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Coupon rate
Term
Par Value
Current price
8%
30 years
$1,000
$1,276.76
• What is the:
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Current Yield?
Yield to Maturity?
Bond equivalent Yield?
Effective Annual Yield?
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