Module 6: High-Yield Bonds, Prices, Yields & Spreads

What is a corporate bond?

It is money investors lend to a company. The company promises interest and repayment under the bond terms.

What makes a bond high yield?

It is generally rated below investment grade, meaning higher credit risk and usually a higher required yield.

What does par value mean for a bond?

It is the face amount the issuer is scheduled to repay at maturity, assuming no default or earlier redemption.

A bond trades at 95. What does that price mean?

It costs 95% of face value: $950 for each $1,000 of principal, before accrued interest and fees.

A $1,000 bond has a 7% annual coupon. How much interest per year?

$70 per year: 7% of the $1,000 face value, assuming the full principal remains outstanding.

That 7% coupon is paid twice a year. How much is each payment?

$35 every six months on $1,000 face value, assuming regular equal payments.

What is a bond’s maturity date?

The scheduled date when the remaining principal comes due, unless it is repaid earlier or the issuer defaults.

You know a bond's price and coupon. What else do you need for exact YTM?

Time to maturity, coupon payment dates, and the principal repayment terms.

What does it mean when a bond trades at a premium?

Its price is above face value—for example, 105 means paying $105 per $100 of principal.

Does a bond trading below par automatically mean it is cheap?

No. The discount could reflect higher default risk, weaker liquidity, or unfavorable terms.

If market rates rise, does a fixed-rate bond’s coupon rise?

No. Its promised fixed coupon stays the same; its market price and yield can change.

Why does a bond’s maturity matter to a credit investor?

It affects how long the risk lasts and when the company must repay or refinance the principal.

What is the difference between coupon and yield?

The coupon sets the bond’s interest payments. Yield reflects those payments relative to the bond’s price and timing.

How do you calculate a bond’s current yield?

Divide the annual coupon dollars by the bond’s current market price. It ignores repayment gains or losses.

A 6% coupon bond trades at 90. What is its current yield?

About 6.67%: $6 of annual coupon divided by a $90 price per $100 of face value.

What is yield to maturity, or YTM?

The annualized discount rate implied by the price and promised cash flows through maturity, assuming payment in full.

Why is yield to maturity not a guaranteed return?

The issuer might default, the bond could be sold early, and reinvestment outcomes can differ.

A regular noncallable bond trades at par. How does YTM compare with its coupon?

They are generally equal for a standard fixed-rate bond when the promised payments are made.

A noncallable bond trades at 95 and repays 100 at maturity. What boosts its YTM?

Besides coupon payments, the investor receives a five-point gain if the issuer repays at par.

Why do fixed-rate bond prices usually fall when required yields rise?

Its existing payments become less attractive, so the price falls to offer buyers a higher yield.

A bond’s price falls from 100 to 95. What happens to its quoted yield?

Its yield generally rises if the promised cash flows and bond terms have not changed.

A 6% coupon bond trades at 105. What is its current yield?

About 5.71%: $6 divided by $105 for every $100 of face value.

A 6% annual coupon bond trades at 95 with 5 years left. Rough YTM?

About 7.2%: (6 + 5/5) divided by 97.5. It's an estimate, not exact YTM.

What is the difference between clean price and dirty price?

Clean price excludes accrued interest. Dirty price includes it and is generally the settlement amount before fees.

You buy $500,000 face value of bonds at 98. What is the clean cost?

$490,000: 98% of $500,000, before accrued interest and fees.

What is one basis point?

One-hundredth of a percentage point. One hundred basis points equals one percentage point.

What is a bond’s credit spread, in simple terms?

The extra yield above a suitable benchmark, using the same spread convention and comparable maturity.

A bond yields 8% and its Treasury benchmark yields 5%. Simple spread?

Three percentage points, or 300 basis points, using those comparable yields.

What are the two big market drivers of a corporate bond’s yield?

Changes in benchmark interest rates and changes in the spread investors demand for credit risk.

Treasury yields fall 0.5%, but spreads widen 1%. What happens to required yield?

It rises about 0.5% in this simplified example, so the bond price would usually fall.

If a bond’s credit spread tightens, what usually happens to its price?

Its price usually rises if benchmark rates and other factors stay the same.

Why might a high-yield bond’s spread widen?

Investors may fear weaker earnings, default or recovery risk, poor liquidity, or broader market stress.

What does bond duration tell you?

Roughly how sensitive the bond’s price is to a change in yields. The exact measure matters.

Duration is 4 and yields rise 1%. Approximate price move?

About a 4% decline, before convexity and other effects. This is a first-order estimate.

Spread duration is 4 and spreads widen 150 basis points. Price impact?

About a 6% decline: 4 × 1.5%, before carry, convexity and other market moves.

What does it mean when a bond is callable?

The issuer can repay it before maturity on specified dates at the contractual call prices.

What is yield to call?

The yield calculated using a specified call date and call price instead of final maturity.

What is yield to worst?

The lowest modeled yield among the relevant contractual redemption dates, assuming no default.

Why can a premium callable bond be unattractive?

You may pay more than the call price and lose that premium if the issuer redeems it early.

An 8% bond costs 108 and is called at 102 in one year. Simple return?

About 1.85%: (8 coupon + 102 redemption − 108 price) ÷ 108, assuming one full year.

What is OAS, or option-adjusted spread?

A model-based spread over a benchmark curve that accounts for bond options. It is not a promised return.

What is the basic idea of convexity?

Bond prices do not move in a perfectly straight line with yields. Calls can limit price upside.

How would you estimate a bond’s one-year total return?

Add coupon cash and the change in price, then divide by the starting price; adjust for timing and costs.

Why does trading liquidity matter when comparing bonds?

A hard-to-trade bond may have a wider bid-ask spread and be costly to sell when markets weaken.

Bond A yields 9% and Bond B yields 7%. Is A automatically better?

No. I would compare default risk, maturity, ranking, call terms, liquidity and recovery before judging value.