Bond Prices and Yields

These flashcards cover key concepts regarding bond prices, yields, characteristics, pricing mechanisms, and market dynamics.

Bond Characteristics

Security that obligates issuer to make payments to holder over time.

Face Value/Par Value

Payment to bondholder at maturity of bond.

Coupon Rate

Bond’s annual interest payment per dollar of par value.

Zero-Coupon Bond

Pays no coupons, sells at discount, provides only payment of par value at maturity.

Bond Pricing Formula

Bond value = Present value of coupons + Present par value.

Interest Rate Fluctuations

Primary source of bond market risk, causing bond prices to fall as market interest rates rise.

Yield to Maturity

Discount rate that makes present value of bond’s payments equal to price.

Current Yield

Annual coupon divided by bond price.

Premium Bonds

Bonds selling above par value (coupon rate more than yield to maturity).

Discount Bonds

Bonds selling below par value (coupon rate less than yield to maturity).

Holding Period Return (HPR)

Return over a particular investment period; depends on market price at end of period.

Investment Grade Bond

Rated BBB and above by S&P or Baa and above by Moody’s.

Speculative Grade Bond

Rated BB or lower by S&P, Ba or lower by Moody’s, or unrated.

Yield Curve

Graph of yield to maturity as a function of term to maturity.