Bonds: Introduction and Bond Mathematics

Comprehensive vocabulary flashcards covering the definitions, key concepts, risks, and pricing mathematics of bonds from Lessons 1 and 2.

Bond

A financial instrument through which an organisation borrows money from investors and agrees to repay that money according to predetermined terms; essentially a formal loan representing debt.

Issuer

The organisation (such as a government, corporation, or financial institution) that borrows money by issuing a bond.

Bondholder

The investor who lends money by purchasing a bond and holds the status of a creditor rather than an owner or equity holder.

Face Value (Par Value)

The nominal amount stated on a bond that the issuer promises to repay at maturity, which is also used to calculate contractual coupon payments.

Principal

The total amount borrowed by the issuer that is generally due for repayment at the bond's maturity.

Coupon

The periodic contractual interest payment made by the issuer to bondholders.

Coupon Rate

The annual interest rate expressed as a percentage of the bond's face value, calculated as $\text{Coupon Rate} = \frac{\text{Annual Coupon}}{\text{Face Value}}$.

Maturity

The agreed calendar date on which the bond's principal amount becomes due for repayment by the issuer.

Fixed-Income Security

A financial instrument that generally provides predetermined or contractually defined periodic cash payments to investors.

Default

A failure by the bond issuer to meet its contractual payment obligations for interest or principal repayment.

Default Risk

The risk that the issuer of a bond may fail to pay scheduled interest or repay the principal at maturity.

Interest-Rate Risk

The risk that market interest rates will rise, which generally causes the market prices of existing fixed-rate bonds to fall.

Inflation Risk

The risk that rising inflation will erode the purchasing power of fixed interest income and principal repayments received from a bond.

Liquidity Risk

The risk that a bondholder may struggle to sell an existing bond quickly at a fair market price.

Currency Risk

The risk that adverse foreign exchange rate movements will negatively impact the investor's returns when holding a bond denominated in a foreign currency.

Trading at Par

The pricing condition where a bond's current market price is exactly equal to its face value ($100\%$ of par).

Trading at a Premium

The pricing condition where a bond's current market price is higher than its face value (e.g., $105\%$ of par).

Trading at a Discount

The pricing condition where a bond's current market price is lower than its face value (e.g., $95\%$ of par).

Current Yield

A return metric comparing the annual coupon income to the bond's current market price, given by $\text{Current Yield} = \frac{\text{Annual Coupon}}{\text{Current Market Price}}$.

Yield to Maturity (YTM)

The annualised rate of return implied by a bond's market price and scheduled contractual cash flows, assuming payments are made in full and the bond is held until its final maturity.

Present Value

The value today of expected future cash flows after discounting them using a required rate of return; the foundational concept used to price bonds.

Zero-Coupon Bond

A debt security that makes no periodic interest payments and is instead issued or traded at a discount, offering returns via the difference between the purchase price and the full face value repaid at maturity.

Callable Bond

A bond that grants the issuer the contractual right to repay the principal before its stated maturity date under specified conditions.

Yield to Call (YTC)

A yield calculation estimating an investor's return under the assumption that a callable bond will be redeemed on a specified call date using the call price and coupons paid up to that date.