Chapters 5,6

1.Contract b/w issuer and investor --Investor lends money to issuer and thus, becomes a creditor. Issuer, who can be the gov't or a private business, promises to pay the money back when it matures along with interest (coupon rate).

1.Bearer-Does not have the name of the owner recorded either on the bond or on the books of the issuer. The bond has interest coupons attached. When payment is due, holder clips off the appropriate coupon and deposits it in a bank. NO LONGER ISSUED IN U.S.

1.Registered as to principal only will have the owner's name/address. Payments are received by means of attached interest coupons 2.Fully Registered-Payments are received by means of a check from the issuer every six months 3.Book entry form-Becoming quite common. No phyiscal bond issued. Done by computer. All negotiable U.S. Treasury/gov't agency debt is issued in book entry form.

Amount that the issuer agrees to pay the investor when the bond matures. Also called, principal or face amount. Typically issued with $1000 par. Many munis are $5000. Round lot of bonds would be $100000 of total par value.

1.When selling less than par=discount. When selling more than par=premium. 2.Price of bond usually stated as a % of its par value. Bond price=90, selling at a discount for $900. 3.1% increment=point. Dollar value of a bond point is $10.

1.Day on which issuer pays the face amount. Investor will receive last semiannual interest payment. 2.Can be short-term or 100 years. Longer maturity pays higher interest. Market prices of long-term tend to be more volatile.

1.Serial Bond Issue-bonds mature sequentially. Allows issuer to pay principal over time. 2.Term Bond Issue-All bonds mature at the same time. Called dolland bonds as they are qouted at a dollar price in secondary market. 3.Balloon issue-Portion of issue mature serially with a large portion of them maturing in one specific year.

1.The stated amount of interest is called the interest rate. 2.Zero Coupon-Bonds that do not pay interest at regular intervals. Instead, the bonds are bought a very large discount. At maturity, principal paid in full. Used for investors who want a lump sum of cash in so many years.

Stated rate of interest. FIXED AND WILL NO CHANGE. 10% coupon pays $100 per year.

Bond's market price may fluctuate. Current yield measures the interest the investor receives from the bond compared to its current market price. Current Yield= Annual Interest Payment/Current Market Price Does not take into consideration the price appreciation on a discount bond or price depreciation on a premium bond.

Measures investor's total overall return. Most widely quoted type of yield for bonds.

Takes into acount a bond's cash flow through its first call date. Calculated the same way as YTM, except that it reflects the bond's interest payments until it is called, rather than when it matures.

As interest rates RISE, the price of existing bond DECLINE since the demand for existing bonds that now offer lower interest rates will decline, driving down their prices. If interest rates DECLINE, the price of existing bonds will INCREASE since they are worth more than a new bond with a lower coupon

Definition:When one purchases a bond, he or shes runds the risk that the market value of their investments may decline if interest rates rise. Bonds with londer maturities are more vulnerable to interest rate risk. Also, bonds with lower coupon rates rend to be more sensitive to interest rate risk.

-10% bond was purchased at 100 -Nominal Yield is coupon -Current yield= $100/$1000=10% Since the bond was purchased at par and will be redeemed at pat at maturity, the YTM will also be 10%