Deskins, Lecture Notes 2
A) Bond Market
-Referred to as debt finance.
-A bond is a certificate of indebtedness.
-Bonds can vary in time to maturity:
few months…30 years.
-Types of bonds: coupon bond, discount bond, fixed-payment bond
-Bonds vary in risk:
Default Risk –
higher interest rate
(For long-term bonds) (also see Moody’s and Fitch)
AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-, BB+…
Consider an example of a Coupon Bond:
Face Value = $1,000; coupon rate = 10%; time to maturity = 2 years; interest paid
Purchase the bond at face value, Jan. 1, 2008.
Interest payment of 0.1*1,000, Jan. 1, 2009.
Interest payment of 0.1*1,000 + payment of 1,000 (FV), Jan.1, 2010
Suppose you sell the bond just after the interest payment was made on Jan. 1, 2009: