FinanceLesson 1 of 1 in the course Bonds and Bond Valuation

Bond Cash Flows, Valuation, and Yield Relationships

5 flashcards · 5 quiz questions · 5 match pairs · 5 fill-in sentences · English

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Summary

Bond valuation begins by identifying what an investor will receive and when. This lesson introduces the main bond terms and shows how to map coupon and principal payments onto a timeline.

A bond is a financial asset through which an issuer borrows money from investors. The issuer promises to make scheduled interest payments and repay the face value (also called par value or principal) at maturity.

All flashcards

What is a bond?
A financial asset through which an issuer borrows from investors and promises specified payments.
Face value
The principal amount the issuer promises to repay at maturity.
Periodic coupon formula
For face value F, annual coupon rate c, and m payments per year: C=F×cmC=\frac{F \times c}{m}.
Yield to maturity (YTM)
The discount rate that equates a bond’s current price with the present value of its promised payments.
Premium bond
A bond that trades above face value, generally when its coupon rate exceeds its YTM.

Quiz questions

  1. How is the price of a standard coupon bond calculated?Answer: As the present value of its coupon stream plus the present value of its principal.
  2. What does a bond’s yield to maturity represent in bond valuation?Answer: The discount rate that makes the present value of promised payments equal the current price.
  3. For a $1,000 bond with a 4% annual coupon, semiannual payments, 15 years to maturity, and a 5% annual YTM, which calculator inputs match the payment schedule?Answer: 30 periods, $20 per coupon, and 2.5% yield per period.
  4. How does a variable-rate bond’s coupon generally change over time?Answer: It resets periodically according to a stated reference rate, often with a spread.
  5. All else equal, what generally happens to the price of an existing fixed-rate bond when market yields rise?Answer: Its price generally falls.

Based on Principles of Finance by Julie Dahlquist, Rainford Knight (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.

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