Bond Basics
This is the amount paid to the bondholder at maturity.
Face value/ Par value
This rate is used to discount future cash flows in bond valuation.
Required rate of return
This risk arises from fluctuations in interest rates.
interest rate risk
This is the market where new bonds are issued.
primary market
This type of bond is backed by specific assets of the issuer.
Secured bonds.
Bonds issued by companies are known as these.
Corporate bonds.
A bond selling above its face value is said to be selling at this.
Premium
This risk refers to the possibility that the issuer may default.
credit risk
This is the market where existing bonds are traded.
Secondary Market.
This type of bond is not backed by collateral and relies on the issuer’s creditworthiness.
Debenture bonds
This type of bond pays no periodic interest and is sold at a discount.
Zero coupon bond
The value of a bond is the present value of these two components.
coupon payments and face value
The possibility that the bond will not be sold at market or near its market value.
Liquidity risk.
These agencies assess the creditworthiness of bond issuers.
Credit Rating agencies
This clause allows the issuer to repay the bond before maturity.
Call provisions
This type of bond allows conversion into equity shares.
Convertible Bonds.
When market interest rates rise, bond prices do this.
Decrease in value.
This is the risk that a bond may be redeemed early by the issuer.
Bonds issued by the government are called these.
Treasury bonds.
This clause allows the bondholder to sell the bond back to the issuer.
Put provisions.
The legal agreement outlining the terms of a bond is called this.
Bond indenture.
This formula is used to calculate the price of a bond with annual coupons.
PV = ∑(C / (1+r)^t) + FV / (1+r)^n?
This advanced measure adjusts duration for changes in yield.
Convexity.
This term describes the overall demand and supply conditions for bonds.
Market sentiments.
Bonds with this feature adjust their interest payments based on inflation.
inflation-indexed bonds