A bond is an agreement in which an issuer borrows money from investors and promises specified future payments. This lesson introduces bonds as investments and explains the core terms used to describe their cash flows and market prices.
When an investor buys a bond, the investor is lending money to the bond’s issuer. The issuer may be a corporation, a government, or a municipality. In return, the issuer agrees to make payments under the terms of the bond agreement.
All flashcards
What makes a bond callable?
Its issuer can redeem it before the normal maturity date under specified conditions.
What is a bond rating?
An assessment of credit quality and the issuer’s ability to meet its obligations.
What are junk bonds?
Lower-quality corporate bonds with comparatively high risk and potential return.
What is the risk–return relationship for bonds?
Riskier bonds generally need to offer the possibility of higher returns, but higher returns are not guaranteed.
What is a savings bond?
A debt security through which a purchaser lends money to the government.
Quiz questions
If market interest rates rise, what generally happens to the price of an existing fixed-rate bond?Answer: Its price generally falls because its fixed payments become less attractive.
What option does a convertible bond give its holder?Answer: The option to exchange the bond for a specified number of the issuer’s common shares.
What is the typical maturity range for U.S. Treasury notes?Answer: One to ten years.
How is a coupon bond’s estimated value calculated using present-value methods?Answer: By adding the present values of its coupon payments and principal repayment.
Why can the global bond market’s total value exceed the global stock market’s total value?Answer: Bond-market totals include sovereign bonds, with no equivalent category in stock-market totals.
Based on Principles of Finance by Julie Dahlquist, Rainford Knight (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.