Bonds and Their Valuation


Introduction to Bonds

fixed income security specifies series of future payments
contract specifies timing & amounts of cash flows over time
- how often the payments are made: coupon payment time
- pre-specified period of time that the loan has to be paid: maturity date
- coupon payments represent the interest on bonds
- par (face) value is amount paid to bond holder at maturity

securities which establish creditor relationship between purchaser & issuer
such as corporations, governments and government agencies
receives a certain amount of money in return for the bond
is obligated to repay the principal at maturity to purchaser
corporate bond – issued by a corporation
municipal bond – issued by municipality
treasury bond – issued by government, maturity more than 10 years, 2xin a year coupon payments
treasury notes – similar to treasury bond, issued for 1-10 years
treasury bills (zero coupon bonds) – held for a shorter time period, matures in 3,6,9 months

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