Putting the Main Bond Characteristics Together…•If you buy a bond, the issuer (i.e., the borrower) promises to pay you back (i) the “par value” (assume $1000) on a particular day – the "maturity date" – and (ii) periodic “coupons” at a predetermined rate of interest based on the stated "coupon rate" and the number of coupon payments per year.•As a creditor/lender, your cash flows to be received will be the par value and the periodic coupon payments.
Example 2:A Bond with a $1,000 Face Value, a 5% Coupon Paid Semi-Annually•Jim buys a $1,000 bond with semiannual coupon payments. The bond has an annual stated coupon rate of 5%. What will the coupon payments be on Jim’s bond? 9
10 More Bond Terminology .
11 More Bond Terminology
12 . More Bond Terminology
13 Sinking Fund: • A pool of money set aside by a corporation to help repay a bond issue. To lessen its risk of being short on cash at the time of bond maturity, the company agrees to create a sinking fund. Sinking fund provisions usually allow the company to repurchase its bonds periodically and at a specified sinking fund price (usually the bonds' par value) or the prevailing current market price.
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