bond

Examples of bond in the following topics:

• Taxes and Bond Prices

  • Taxes can cause bond prices and interest rates to differ.
  • For example, the U.S. government bonds have a lower risk of default and higher liquidity than municipal bonds, whereas municipal bonds are the state and local government bonds.
  • Government has exempted municipal bonds from federal taxes.
  • On the other hand, the taxed bonds are not as attractive as an investment, so investors buy fewer bonds, causing bond prices to fall and interest rates to rise.
  • Therefore, municipal bonds have a lower interest rate than U.S. government bonds.

• Other Types of Bonds

  • Other bonds include register vs. bearer bonds, convertible bonds, exchangeable bonds, asset-backed securities, and foreign currency bonds.
  • Fixed rate bonds have a coupon that remains constant throughout the life of the bond.
  • Convertible bonds are bonds that let a bondholder exchange a bond for a number of shares of the issuer's common stock.
  • A serial bond is a bond that matures in installments over a period of time.
  • Eurodollar bond - U.S. dollar-denominated bond issued by a non-U.S.

• Purchase Process

  • Most individuals purchase bonds via a broker or through bond funds.
  • Most individuals who want to own bonds purchase bonds via a broker or do so through bond funds.
  • An individual can also purchase bonds by investing in bond funds, which hold baskets of bonds rather than competing for individual bond sales.
  • Most bond funds pay out dividends more frequently than individual bonds.
  • Bond funds invest in many individual bonds, so that even a relatively small investment is diversified.

• Liquidity and Bond Prices

  • Liquidity causes bond prices and interest rates to differ.
  • We start the analysis with the same liquidity in both the government bond and corporate bond markets in Figure 2.
  • Thus, both bond markets have the identical equilibrium bond price, P*, and hence, the exact liquidity.
  • Thus, the government bond prices rise, which reduces the interest rate for government bonds.
  • On the other hand, the corporate bond prices decrease, raising the market interest rate for corporate bond.

• Call Provisions

  • A callable bond (also called redeemable bond) is a type of bond that allows the issuer of the bond to retain the privilege of redeeming the bond at some point before the bond reaches its date of maturity.
  • Most callable bonds allow the issuer to repay the bond at par.
  • The price behavior of a callable bond is the opposite of that of puttable bond.
  • Price of callable bond = Price of straight bond – Price of call option
  • Similarly, yield on a callable bond is higher than the yield on a straight bond.

• The Nature of Bonds

  • A bond is an instrument of indebtedness of the bond issuer to the holders.
  • A bond is an instrument of indebtedness of the bond issuer to the holders, as such it is often referred to as a debt instrument.
  • The main categories of bonds are corporate bonds, municipal bonds, and U.S.
  • Bond maturities range from a 90-day Treasury bill to a 30-year government bond.
  • A bond is a form of loan: the holder of the bond is the lender (creditor), the issuer of the bond is the borrower (debtor), and the coupon is the interest.

• Advantages of Bonds

  • In finance, a bond is an instrument of indebtedness of the bond issuer to the holders.
  • Most individuals who want to own bonds do so through bond funds.
  • Bonds are often liquid.
  • There are also a variety of bonds to fit different needs of investors, including fixed rated bonds, floating rate bonds, zero coupon bonds, convertible bonds, and inflation linked bonds.
  • A bond is an instrument of indebtedness of the bond issuer to the holders.

• Zero-Coupon Bonds

  • A zero-coupon bond (also called a "discount bond" or "deep discount bond") is a bond bought at a price lower than its face value, with the face value repaid at the time of maturity.
  • Treasury bills, U.S. savings bonds, and long-term zero-coupon bonds.
  • This method of creating zero coupon bonds is known as stripping, and the contracts are known as strip bonds.
  • The bonds can be held until maturity or sold on secondary bond markets.
  • The impact of interest rate fluctuations on strip bonds is higher than for a coupon bond.

• Information Costs and Bond Prices

  • Information costs influence the bond prices and interest rates.
  • We depict the bond markets in Figure 3.
  • Thus, investors are attracted to the low-information cost bonds, boosting their demand for low information cost bonds, increasing the market price and decreasing market interest rate.
  • High information cost bonds are not as attractive as an investment, so investors buy fewer bonds, reducing bond prices and raising interest rates.
  • Therefore, low-information-cost bonds pay a lower interest rate.

• Calculating Yield to Maturity Using the Bond Price

  • To achieve a return equal to YTM (i.e., where it is the required return on the bond), the bond owner must buy the bond at price P0, hold the bond until maturity, and redeem the bond at par.
  • If the yield to maturity for a bond is less than the bond's coupon rate, then the (clean) market value of the bond is greater than the par value (and vice versa).
  • If a bond's coupon rate is less than its YTM, then the bond is selling at a discount.
  • If a bond's coupon rate is more than its YTM, then the bond is selling at a premium.
  • If a bond's coupon rate is equal to its YTM, then the bond is selling at par.