A bond is a fixed-income security where the issuer borrows capital from the investor and agrees to pay back with interest over a specified period. It is commonly used by corporations and governments as a way to finance long-term projects.
5 Must Know Facts For Your Next Test
Bonds have a face value which is the amount paid back at maturity.
The coupon rate is the interest rate paid by the bond issuer on the bond's face value.
Bonds can be issued at par, premium, or discount based on market conditions.
Bond prices are inversely related to interest rates; when rates rise, bond prices fall.
The yield to maturity (YTM) represents the total return anticipated on a bond if it is held until it matures.
Review Questions
What happens to bond prices when interest rates rise?
Explain what 'yield to maturity' means in relation to bonds.
How does issuing a bond at a discount affect its initial price compared to its face value?
Related terms
Coupon Rate: The annual interest rate paid on a bond's face value.
Yield to Maturity (YTM): The total return expected on a bond if held until it matures.