Bond Basics: Definitions, Types, Pricing, and Duration Concepts

What is a bond?

A loan from an investor to a borrower that pays interest and returns principal at maturity

What is face (par) value?

The amount repaid at maturity (usually $1,000)

What is a coupon payment?

Periodic interest payment (coupon rate × face value)

What is Yield to Maturity (YTM)?

The total return if the bond is held until maturity

What is a fixed coupon bond?

A bond with constant interest payments

What is a zero-coupon bond?

A bond that pays no interest and is sold at a discount

What is a callable bond?

A bond the issuer can repay early

What is a premium bond?

Price > par; YTM < coupon rate

What is a discount bond?

Price < par; YTM > coupon rate

What is a par bond?

Price = par; YTM = coupon rate

What happens to bond prices when interest rates increase?

Bond prices decrease

What happens to bond prices when interest rates decrease?

Bond prices increase

What is the relationship between bond price and YTM?

Inverse relationship

What is the bond pricing formula?

Price = PV of coupons + PV of face value

What is the zero-coupon bond formula?

Price = FV / (1 + r)^n

What is duration?

A measure of interest rate risk

What does duration measure?

Sensitivity of a bond's price to interest rate changes

What is Macaulay duration?

Weighted average time to receive cash flows

What is modified duration?

Percent change in price for a 1% change in interest rates

If bond price is above $1,000, what type is it?

Premium bond

If bond price is below $1,000, what type is it?

Discount bond

If coupon rate equals YTM, what is the bond price?

Par value ($1,000)

What happens to YTM when bond price increases?

YTM decreases

What happens to YTM when bond price decreases?

YTM increases

What is the coupon payment on a $1,000 bond with 8% coupon?

$80

What is the coupon payment on a $1,000 bond with 6% coupon?

$60

Why are zero-coupon bonds sold at a discount?

Because they pay no periodic interest

What does higher duration mean?

More sensitivity to interest rate changes

What does lower duration mean?

Less sensitivity to interest rate changes