Thuc notes © 2020

Bond

Part of series finance |
  • A loan made by you, a lender, to a borrower who’s government, company or organization
  • Fixed-income security with fixed periodic interest, and the eventual return of principal at maturity.

Category:

  • Corporate bonds
  • Municipal bonds
  • Government bonds

Varieties:

  • Zero-coupon bond: Don’t have a coupon but issued at a discount to their par value.
  • Convertible bond: It’s bond with option can convert the debt into stock at some point. It helps the loan have a lower interest rate.
  • Callable bond: allows the issuer can repurchase the bonds from bondholders for the principal amount and reissue new bonds at a lower coupon rate
  • Puttable bond: enables the bondholders to sell the bond back to the company before it has matured

Terms:

  • Issuer: who need loan a money to use. They can be governments or corporations
  • Debtholders, lender, creditors: who’s the owner of the bond, lends money to the issuer.
  • Par, face value, bond principal: It’s the value of the bond and will be paid back to the bond’s owner in maturity date. It’s used to calculate interests or benefits to the bond’s owner.
  • Maturity date: Agreement date when issuer must pay back bond principal to bond’s owner
  • Coupon: The interest money that the bond’s owner earns for loaning. It’s periodic interest.
  • Coupon rate: The interest rate defines how much coupon will be return to bond’s owner. It’s based on Par.
  • Coupon dates: Defines the date when coupon will be paid to bond’s owner. It’s frequently semiannual
  • Credit ratings, or investment-grade: quantified assessment. S&P, Moody’s, Fitch Ratings
  • Duration: Duration measures how long it takes, in years, for an investor to be repaid the bond’s price by the bond’s total cash flows. It measures the sensitivity of the bond’s price to a change in market interest rates.
  • Convexity: Convexity demonstrates how the duration of a bond changes as the interest rate changes. Portfolio managers will use convexity as a risk-management tool to measure and manage the portfolio’s exposure to interest rate risk.
  • Pricing bonds: market price of the bond
  • Yield to maturity: is the total return anticipated on a bond if the bond is held until the end of its lifetime.
  • Denomination: acceptable payment options in trades

How to buy:

Government bonds

  • Can by from TreasuryDirect or broker

Corporate or municipal bonds

  • Can by from broker

TreasuryDirect

Notes:

  • The issuer has a poor credit rating, the risk greater, and these bonds pay more interest
  • Bonds have a very long maturity date, it frequently pays a higher interest rate
  • Example duration’s 5 years. Interest increase 1%, bond’s price will be down 5% (1% * 5). Reference