Bonds and yields

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  • bond: represents a loan made by investors to the issuer. Bond value = PV of coupons + PV of par value ;inverse relationship between bond value and YTM
    • In return the issuer promises to:
      • Regular coupon payments every period until the bond matures
        • Coupon rate = Annual coupon payment / Face value
      • The face/par/principle/maturity value of the bond when it matures
    • The discount rate or interest rate per year = yield to maturity; YTM is the required rate of return for a bond; Y  ield to maturity is a measure of the average rate of return that will be earned if the bond is held to maturity
      • relationship with coupon rate: YTM = CR: at par; CR>YTM: at premium; CR<YTM: at discount; all three have the same YTM so the same risk level only diff is how they pay back the coupons
    • Alternative yields
      • Current yield=Coupon/Price
      • holding period yield = capital gain + current yield

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