Bond: A bond is normally an interest only loan, meaning the borrower
pays the interest every period, but none of the principal is repaid until
the end of the loan.
Two features of bond
• Credit quality & duration are the principal determinants of a
bond’s interest rate.
Coupons: The stated interest payments made on a bond.
Face value (par value): The principal amount of a bond that is
repaid at the end of the term.
Coupon rate: The annual coupon divided by the face value of a
Maturity date: specified date at which the principal amount of a
bond is paid.
Yield to maturity (YTM): The market interest rate that equates a
bond’s present value of interest payments and principal repayment with
Bond value= PV of coupons + PV of par
= c [(11/(1+r)t) /r] + F/(1+r)t
Bond value= PV annuity + PV of lump sums
If interest rate increases then the Present Value
decreases Bond value decreases. If YTM= Coupon rate, then par value = bond price.
If YTM > Coupon rate, then par value > bond price
(Discount Bond) .