1.
Features of a bond:
A.
Par value – face amount of the
bond which is paid at maturity
B.
Coupon interest rate – stated
interest rate (generally fixed)
paid by the issuer.
Coupon interest rate
×
par value =
interest payment
C.
Maturity date – years until the
bond must be repaid
D.
Issue date – when the bond was
issued
E.
Yield to maturity (YTM) – rate
of return earned on a bond held
to maturity; also called the
“Promised Yield”.
YTM = current yield + capital gains yield
(a) Equals the expected rate of
return ONLY if (1) the
probability of default is 0,
and (2) the bond cannot be
called
Expected total return = YTM = (expected
CY) + (expected CGY)
F.
Discount bond – sells below
par; market interest rate is
greater than the coupon rate
G.
Premium bond – sells above
par; market interest rate is less
than the coupon rate
H.
Current yield – does not
represent the total return
investors expect to receive
because it doesn’t take into
account capital gain/loss that
will be realized if the bond is
held to its
maturity (or call)
Current yield (CY) = Annual
coupon payment/current price
I.
Capital gains yield (CGY) =
change in price/beginning
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 Spring '09
 caples
 Interest, Interest Rate, c. Bond

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