10.a Bond Pricing Rule #1
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8 Terms
Bond pricing rule number one
Interest rates and prices are inversely related.
Coupon rate
The interest rate that the bond issuer pays to the bondholders, typically expressed as a percentage of the bond's face value.
Premium bond
A bond that is sold for more than its face value because its coupon rate is higher than current interest rates.
Discount bond
A bond that is sold for less than its face value because its coupon rate is lower than current interest rates.
Current yield
The annual coupon payment divided by the price of the bond, indicating the return on investment based on the current price.
Capital gain
The profit realized from the sale of an asset when its selling price exceeds the purchase price.
Cash flow component
The portion of the total return that comes from periodic coupon payments.
Total return
The income generated from investments, including both cash flows and capital gains.
