Understanding Bonds: Coupon Rate, YTM, and Pricing

A collection of flashcards designed to help understand key concepts related to bond pricing, coupon rates, and yields.

Coupon Rate

The interest rate that a bond issuer pays to bondholders, typically expressed as a percentage of the par value.

Yield to Maturity (YTM)

The total return expected on a bond if held until maturity, taking into account the present value of future coupon payments and the par value.

Premium Bond

A bond that sells for more than its par value, typically because its coupon rate is higher than the current market interest rates.

Discount Bond

A bond that sells for less than its par value, typically because its coupon rate is lower than the current market interest rates.

Par Bond

A bond that sells at its par value, typically because its coupon rate is equal to prevailing market interest rates.

Price Risk

The risk that bond prices will fall when market interest rates rise, making existing lower-yielding bonds less attractive.

Reinvestment Risk

The risk that future coupon payments will have to be reinvested at a lower interest rate than expected.

Interest Rate Risk

The risk of fluctuations in bond prices due to changing interest rates.

Bond Pricing Equation

The present value of future cash flows, including coupon payments and the par value at maturity, discounted at the market YTM.

Movement Towards Par Value

The phenomenon where a bond's price approaches its par value as it nears maturity, regardless of whether it was sold at a premium or discount.