Bonds

What is the toolset of the financial system to maintain money flow

• A sophisticated payment mechanism - allows individuals to make and recieve payments quickly and safely over long distance

• Borrowing and lending - distribution of savings towards investment

• Pooling risk - individuals share risk

• Provides information - allows estimations of expected rate of return

Financial markets - any market that trading takes place in

Markets have different funcanalitites for cooperation.

• source of funding - companies can issue stocks and bonds

• Investor liquidity - investors can easily buy and sell financial securities

• Risk management - include different securities in their portfolio

• Scourge of information (principle 5) - Company share prices, interest rates, inflation rates

What is a bond?

It is a promise, a financial claim that mirrors the perception over the bond issuers financial health, economic value.

This is a contractual obligation, it represents a claim on a cash flow, and it is worth something today.

If you hold onto a bond, you are entitled to recieve annual payments based on the coupon rate.

At maturity, you recieve the final interest payment as well as the face value of the bond.

The largest issuer of bonds are governments

Time to maturity - the time it takes for the bond holder to recieve the bonds face value

Yield to maturity - the rate of return that the investor gets over the life of the bond.

PV bond = PV(annuity of coupon payments) + PV (final payment)

PV =

Cpn = Coupon

Par = face value

Price Bond < Face value = Discount bonds

The bond is paying an interest rate (coupon rate ) which is lower than current rates of similar risk investments.

Price Bond > face value = Premium Bond - Paying more than current rates

Price bond = Face value = par Bond