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advancedbond - Updated Advanced Bond Concepts...

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Updated 01/23/2006 Advanced Bond Concepts http://www.investopedia.com/university/advancedbond/ Thanks very much for downloading the printable version of this tutorial. As always, we welcome any feedback or suggestions. http://www.investopedia.com/contact.aspx Table of Contents 1) Advanced Bond Concepts: Introduction 2) Advanced Bond Concepts: Bond Type Specifics 3) Advanced Bond Concepts: Bond Pricing 4) Advanced Bond Concepts: Yield and Bond Price 5) Advanced Bond Concepts: Term Structure Of Interest Rates 6) Advanced Bond Concepts: Duration 7) Advanced Bond Concepts: Convexity 8) Advanced Bond Concepts: Formula Cheat Sheet 9) Advanced Bond Concepts: Conclusion Introduction In their simplest form, bonds are pretty straightforward. After all, just about anyone can comprehend the borrowing and lending of money. However, like many securities, bonds involve some more complicated underlying concepts as they are traded and analyzed in the market. The goal of this tutorial is to explain the more complex aspects of fixed-income securities. We'll reinforce and review bond fundamentals such as pricing and yield , explore the term structure of interest rates , and delve into the topics of duration and convexity . (Note: Although technically a bond is a fixed-income security with a maturity of ten years or more, in this tutorial we use the term “bond” and “fixed-income security" interchangeably.) The information and explanations in this tutorial assume that you have a basic understanding of fixed-income securities. (Page 1 of 40) Copyright © 2006, Investopedia.com - All rights reserved.
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Investopedia.com – the resource for investing and personal finance education. Bond Type Specifics Before getting to the all-important subject of bond pricing, we must first understand the many different characteristics bonds can have. When it comes down to it, a bond is simply a contract between a lender and a borrower by which the borrower promises to repay a loan with interest . However, bonds can take on many additional features and/or options that can complicate the way in which prices and yields are calculated. The classification of a bond depends on its type of issuer , priority, coupon rate , and redemption features. The following chart outlines these categories of bond characteristics: 1) Bond Issuers As the major determiner of a bond's credit quality, the issuer is one of the most important characteristics of a bond. There are significant differences between bonds issued by corporations and those issued by a state government/municipality or national government. In general, securities issued by the federal government have the lowest risk of default while corporate bonds are considered to be riskier ventures. Of course there are always exceptions to the rule. In rare instances, a very large and stable company could have a bond rating that is better than that of a municipality. It is important for us to point out, however, that like corporate bonds, government bonds carry various levels of risk; because all national governments are different, so are the bonds they issue.
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