Bond outline notes

Bond: A type of investment characterized as a loan issued by a borrowing entity to investors (bond holders).
Issuer: The company or entity that sells the bond to raise funds for projects.
Bond Holder: The investor who purchases the bond, becoming a lender to the issuer.
Principal: The original amount borrowed that the issuer repays to the bond holder at maturity.
- Face Value: The nominal value or dollar value of a bond that is repaid at maturity.
- Par Value: Another term for face value—this refers to the bond's value as determined at issuance.
Interest: The additional amount that the issuer pays the bondholder for the loan.
- Coupon Rate: The interest rate on the bond, usually expressed as a percentage of face value.
- Coupon Frequency: The frequency of coupon payments made by the issuer, typically occurring semi-annually.
- Coupon Payment: The amount paid to the bondholder at each coupon payment date, calculated as a percentage of the principal.
Issued: The process of selling bonds to investors in exchange for capital.
Maturity: The date on which the bond’s principal or face value is repaid to bondholders in full.

Yield to Maturity (YTM): The total return anticipated on a bond if it is held until it matures, incorporating cash flows from interest and principal repayment.
Bond Valuation Formula: The present value of expected future cash flows, which include coupon payments and face value at maturity.
Equal to the Market Price: The market price of the bond reflects its current valuation based on the bond's cash flows and the prevailing interest rates.
Price-Yield Curve: A graphical representation showing the relationship between the price of the bond and its yield.
- Relation Between Prices and Yields: Inverse relation; as bond prices rise, yields fall and vice versa.
- Relation Between Yields and Coupons: Demonstrates how yields vary with coupon rates, determining if a bond is sold at a premium, discount, or par value.

Current Yield: A measure of the income (interest or dividends) generated by an investment relative to its current price.
Yield to Maturity (YTM): As previously defined; a comprehensive measure of return when holding a bond until maturity.
Realized Yield: Reflects the actual yield earned on a bond based on the cash flows received and any capital gains or losses incurred.
- Interest Payments: Directly related to default risk; fluctuations may change the expected income from holding the bond.
- Principal Payments: Also linked to default risk; if the issuer defaults, these payments may not be received as expected.
- Reinvestment Income: This pertains to interest rate risk, impacting how interest payments are reinvested at varying rates.
- Capital Gains or Losses: Related to interest rate risk; changes in interest rates can influence the market price of the bond leading to potential gains or losses.

Default Risk: The risk that the issuer may fail to make expected payments.
- Definition: The likelihood that a bond issuer will not meet its debt obligations.
- Measurement: Assessed primarily through credit ratings provided by credit rating agencies.
- Compensation: Investors may receive a default premium as compensation for taking on this risk.
Interest Rate Risk: The risk that bond prices will decline due to rising interest rates affecting the entire economy.
- Definition: The risk associated with fluctuations in interest rates, impacting the bond market.
- Measurement: Often demonstrated via the price-yield curve.
- Compensation: Term premium compensates investors for exposure to interest rate changes over time.

Coupon Payments: Most bonds typically pay interest semi-annually, making this a standard practice in the bond market.
Face Value: Most bonds are issued with a face value of $1,000.
Liquidity: Bonds are often considered illiquid investments, making it difficult to trade them in the market quickly.

By Issuer: Classified according to who is borrowing the money.
- Corporate Bond: Issued by companies; represents a debt obligation in exchange for capital.
- Treasury Bond: Issued by the U.S. government; considered extremely low-risk.
- Municipal Bond: Issued by local or state governments; often tax-exempt for investors.
By Characteristic: Categorized based on borrowing terms.
- Plain Vanilla Bond: A straightforward bond with a constant coupon rate that offers fixed coupon payments.
- Floating Rate Bond: This bond features a variable coupon rate that changes over time.
- Zero Coupon Bond: Does not pay scheduled interest but is issued at a discount to face value, maturing at par value.
By Rating: Indicates the level of risk associated with default.
- Investment Grade: Bonds rated A or higher; considered low risk.
- Speculative Grade: Bonds rated B; higher risk of default than investment-grade securities.
- Junk Bond (High Yield Bond): Bonds rated C or below; highly speculative and considered very risky.
- Unrated Bond: Bonds that have not been rated by any credit rating agency.
By Price: Based on their market value relative to face value.
- Premium Bond: A bond that trades above its principal value.
- Par Bond: A bond that trades at its principal value.
- Discount Bond: A bond that trades below its principal value, reflecting higher yield potential due to perceived risk.