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Bond Valuation > Key Characteristics of Bonds
Key Characteristics of Bonds
• Par Value
• Coupon Interest Rate
• Maturity Date
• Call Provisions
• Sinking Funds
• Other Features
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Bond Valuation > Key Characteristics of Bonds
Par Value
• When a bond trades at a price above the face value, it is said to be selling at a
premium. When a bond sells below face value, it is said to be selling at a
discount.
• A bond's price fluctuates throughout its life in response to a number of variables,
including interest rates and time to maturity.
• Pull to par is the effect in which the price of a bond converges to par value as time
passes. At maturity, the price of a debt instrument in good standing should equal
its par (or face value).
Temporary bonds for the state of Kansas issued
in 1922
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Bond Valuation > Key Characteristics of Bonds
Coupon Interest Rate
• Coupon interest rate is usually fixed throughout the life of the bond. It can also
vary with a money market index.
• Not all bonds have coupons. Zero-coupon bonds are those that pay no coupons
and thus have a coupon rate of 0%.
• Based on different coupon rates, there are fixed rate bonds, floating rate bonds,
and inflation linked bonds.
Mecca Temple 1922 Bond Coupons
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Bond Valuation > Key Characteristics of Bonds
Maturity Date
• As long as all due payments have been made, the issuer has no further
obligations to the bond holders after the maturity date.
• The length of time until the maturity date is often referred to as the term or tenor
or maturity of a bond.
• In the market for United States Treasury securities, there are three categories of
bond maturities: short term, medium term, and long term.
Austrian war bond
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Bond Valuation > Key Characteristics of Bonds
Call Provisions
• A callable bond is a type of bond that allows the issuer of the bond to retain the
privilege of redeeming the bond at some point before the bond reaches its date of
maturity.
• If interest rates in the market have gone down by the time of the call date, the
issuer will be able to refinance its debt at a cheaper level and so will be
incentivized to call the bonds it originally issued.
• Most callable bonds allow the issuer to repay the bond at par. With some bonds,
the issuer has to pay a premium, known as the call premium.
• Price of callable bond = Price of straight bond – Price of call option. Price of a
callable bond is always lower than the price of a straight bond because the call
Redeemed Bonds
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option adds value to an issuer.
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Bond Valuation > Key Characteristics of Bonds
Sinking Funds
• Sinking fund provision of the corporate bond indenture requires a certain portion
of the issue to be retired periodically.
• A sinking fund reduces credit risk but presents reinvestment risk to bondholders.
• For the creditors, the fund reduces the risk the organization will default when the
principal is due: it reduces credit risk. However, if the bonds are callable, this
comes at a cost to creditors, because the organization has an option on the
bonds.
Farm bond
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Bond Valuation > Key Characteristics of Bonds
Other Features
• The yield is the rate of return received from investing in the bond. It usually refers
either to the current yield, or to the yield to maturity or redemption yield.
• The market price of a tradeable bond will be influenced by the amounts, currency
and timing of the interest payments and capital repayment due, the quality of the
bond, and the available redemption yield of other comparable bonds which can be
traded in the markets.
• Some bonds give the holder the right to force the issuer to repay the bond before
the maturity date on the put dates. These are referred to as retractable or putable
bonds.
San Francisco Pacific Railroad Bond
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Appendix
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Bond Valuation
Key terms
• call provision the right for the issuer to buy back the bond at a predetermined price at a certain time in future
• callable A callable bond (also called "redeemable bond") is a type of bond (debt security) that allows the issuer of the bond to
retain the privilege of redeeming the bond at some point before the bond reaches its date of maturity.
• clean price the price of a bond excluding any interest that has accrued since issue or the most recent coupon payment.
• debentures A debenture is a document that either creates a debt or acknowledges it, and it is a debt without collateral.
• par Equal value; equality of nominal and actual value; the value expressed on the face or in the words of a certificate of value,
as a bond or other commercial paper.
• par value the stated value or amount of a bill or a note
• Preferred Stock Stock with a dividend, usually fixed, that is paid out of profits before any dividend can be paid on common
stock. It also has priority to common stock in liquidation.
• puttable Puttable bond (put bond, putable, or retractable bond) is a bond with an embedded put option. The holder of the
puttable bond has the right, but not the obligation, to demand early repayment of the principal.
• resale market The resale market, also called "secondary market" or "aftermarket," is the financial market in which previously
issued financial instruments, such as stock, bonds, options, and futures, are bought and sold.
• straight bond A straight bond is a bond with no embedded options (call or put options).
• time value of money The value of money, figuring in a given amount of interest, earned over a given amount of time.
• Yield to maturity The internal rate of return on a bond held to maturity, assuming scheduled payment of principal and interest.
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Bond Valuation
Eurozone Government Bonds Yield
Development of yield to maturity of bonds of 2019 maturity of a number of Eurozone governments.
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Bond Valuation
Farm bond
One purpose of a sinking fund is to repurchase outstanding bonds.
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Bond Valuation
Austrian war bond
The first Austrian bonds had 5% rates of return and a five-year maturity.
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Europeana. "Austrian War Bond, item 1." CC BY
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Bond Valuation
Mecca Temple 1922 Bond Coupons
A coupon payment on a bond is a periodic interest payment that the bond holder receives during the time between when the bond is issued and when it
matures.
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Bond Valuation
Redeemed Bonds
This Bond is one of the 400 issued to the Central Pacific Rail Road Company of California and 200 to the Western Pacific Rail Road Company in 1865
under the Act of the California Legislature passed on April 22, 1863. Coupon #1 was redeemed and cancelled on November 2, 1865, and coupon #35 on
November 2, 1882, at which time the principal of $1,000.00 in gold coin was also paid from the Treasury of the City and County of San Francisco and the
Bond was cancelled.
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Bond Valuation
San Francisco Pacific Railroad Bond
$1,000 (30 year, 7%) "Pacific Railroad Bond" (#93 of 200) issued by the City and County of San Francisco under "An Act to Authorize the Board of
Supervisors of the City and County of San Francisco to take and subscribe One Million Dollars to the Capital Stock of the Western Pacific Rail Road
Company and the Central Pacific Rail Road Company of California and to provide for the payment of the same and other matters relating thereto"
approved on April 22, 1863, as amended by section Five of the "Compromise Act" approved on April 4, 1864, to fund the construction of the Western
Pacific Railroad between San Francisco Bay (at Alameda) and the CPRR of Cal. at Sacramento, dated May 1, 1865.
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Bond Valuation
Temporary bonds for the state of Kansas issued in 1922
Par values of these bonds were $50, $100, $10000, and $3000.
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Bond Valuation
When does a bond usually sell at its par value?
A) When the bond matures.
B) When the bond is first issued.
C) When the bond's coupon rate is the same as the bond's yield to
maturity.
D) All of these answers.
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Bond Valuation
When does a bond usually sell at its par value?
A) When the bond matures.
B) When the bond is first issued.
C) When the bond's coupon rate is the same as the bond's yield to
maturity.
D) All of these answers.
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Bond Valuation
A bond makes only one payment - the payment of the face value
on the maturity date. The bond is sold at a discount. What type of
bond is this?
A) Inflation linked bond.
B) Floating rate note.
C) Stepped-coupon bond.
D) Zero-coupon bond
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Bond Valuation
A bond makes only one payment - the payment of the face value
on the maturity date. The bond is sold at a discount. What type of
bond is this?
A) Inflation linked bond.
B) Floating rate note.
C) Stepped-coupon bond.
D) Zero-coupon bond
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Bond Valuation
A bond pays a coupon rate equal to the LIBOR rate plus 0.30%.
The coupon rate is recalculated every three months. What type of
bond is this?
A) An inflation linked bond.
B) A stepped-coupon bond.
C) A zero-coupon bond.
D) A floating rate note.
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Bond Valuation
A bond pays a coupon rate equal to the LIBOR rate plus 0.30%.
The coupon rate is recalculated every three months. What type of
bond is this?
A) An inflation linked bond.
B) A stepped-coupon bond.
C) A zero-coupon bond.
D) A floating rate note.
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Bond Valuation
A US Treasury security matures in 7 years. What type of security
is it?
A) A bill.
B) A money market instrument.
C) A bond.
D) A note.
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Bond Valuation
A US Treasury security matures in 7 years. What type of security
is it?
A) A bill.
B) A money market instrument.
C) A bond.
D) A note.
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Bond Valuation
A US Treasury security matures in 4 years. What type of treasury
is it?
A) A money market instrument.
B) A bill.
C) A note.
D) A bond.
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Bond Valuation
A US Treasury security matures in 4 years. What type of treasury
is it?
A) A money market instrument.
B) A bill.
C) A note.
D) A bond.
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Bond Valuation
The terms of a bond allows its issuer to redeem the security at
anytime. This type of bond is _____.
A) a Bermudan callable.
B) a European callable.
C) an Asian callable.
D) an American callable.
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Bond Valuation
The terms of a bond allows its issuer to redeem the security at
anytime. This type of bond is _____.
A) a Bermudan callable.
B) a European callable.
C) an Asian callable.
D) an American callable.
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Bond Valuation
The terms of a bond allow its issuer to redeem the bond on
December 31st, four years after the bond was issued. The issuer
can only redeem the bond on that date. This type of bond is ____
.
A) a European callable.
B) an American callable.
C) a Bermudan callable.
D) an Asian callable.
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Bond Valuation
The terms of a bond allow its issuer to redeem the bond on
December 31st, four years after the bond was issued. The issuer
can only redeem the bond on that date. This type of bond is ____
.
A) a European callable.
B) an American callable.
C) a Bermudan callable.
D) an Asian callable.
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Bond Valuation
A sinking fund is used by firms to retire some of its outstanding
debt every year. Which of the following is a way that a sinking
fund may operate?
A) The firm may repurchase the bonds in the open market.
B) The firm may buy the bonds at a special call price stipulated in the
bond's sinking fund provision.
C) The firm may repurchase the bonds at the current market price or the
call price, whichever is lower.
D) All of these answers
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Bond Valuation
A sinking fund is used by firms to retire some of its outstanding
debt every year. Which of the following is a way that a sinking
fund may operate?
A) The firm may repurchase the bonds in the open market.
B) The firm may buy the bonds at a special call price stipulated in the
bond's sinking fund provision.
C) The firm may repurchase the bonds at the current market price or the
call price, whichever is lower.
D) All of these answers
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Bond Valuation
A company issues a bond with a coupon rate of 5%. Since the
bond was issued, market interest rates have decreased. What
effect will this decrease have on the bond's market price and its
current yield?
A) The bond will trade above par and its current yield will increase.
B) The bond will trade below par and its current yield will decrease.
C) The bond will trade above par and its current yield will decrease.
D) The bond will trade below par and its current yield will increase.
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Bond Valuation
A company issues a bond with a coupon rate of 5%. Since the
bond was issued, market interest rates have decreased. What
effect will this decrease have on the bond's market price and its
current yield?
A) The bond will trade above par and its current yield will increase.
B) The bond will trade below par and its current yield will decrease.
C) The bond will trade above par and its current yield will decrease.
D) The bond will trade below par and its current yield will increase.
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Bond Valuation
Attribution
• Wikipedia. "Maturity date." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Maturity_date
• Wikipedia. "Bond (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_(finance)#Maturity
• Wikipedia. "puttable." CC BY-SA 3.0 http://en.wikipedia.org/wiki/puttable
• Wiktionary. "callable." CC BY-SA 3.0 http://en.wiktionary.org/wiki/callable
• Wikipedia. "Bond (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_(finance)#Coupon
• Wikipedia. "Coupon (bond)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Coupon_(bond)
• Wikipedia. "time value of money." CC BY-SA 3.0 http://en.wikipedia.org/wiki/time%20value%20of%20money
• Wikipedia. "Pull to par." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Pull_to_par
• Wikipedia. "Bond (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_(finance)#Principal
• Wikipedia. "Par value." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Par_value
• Wikipedia. "resale market." CC BY-SA 3.0 http://en.wikipedia.org/wiki/resale%20market
• Wiktionary. "par value." CC BY-SA 3.0 http://en.wiktionary.org/wiki/par+value
• Wikipedia. "Bond (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_(finance)
• Wikipedia. "Bond option." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_option
• Wikipedia. "debentures." CC BY-SA 3.0 http://en.wikipedia.org/wiki/debentures
• Wikipedia. "Preferred Stock." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Preferred%20Stock
• Wikipedia. "Sinking fund." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Sinking_fund
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Bond Valuation
• Wikipedia. "clean price." CC BY-SA 3.0 http://en.wikipedia.org/wiki/clean%20price
• Wikipedia. "Yield to maturity." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Yield%20to%20maturity
• Wikipedia. "Bond (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_(finance)#Others
• Wikipedia. "Callable bond." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Callable_bond
• Wikipedia. "Bond (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_(finance)#Maturity
• Wikipedia. "Call option." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Call_option
• Wiktionary. "par." CC BY-SA 3.0 http://en.wiktionary.org/wiki/par
• Wikipedia. "straight bond." CC BY-SA 3.0 http://en.wikipedia.org/wiki/straight%20bond
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