Features of bonds

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  • Features of bonds
    • Zero coupon bonds: Make no periodic interest payments (coupon rate = 0%)
    • Sinking fund: Provision to pay off a loan over its life rather than all at maturity - reduces risk to investor
    • Call provision: A provision on a bond or other fixed-income instrument that allows the original issuer to repurchase and retire the bonds. If there is a call provision in place, it will typically come with a time window under which the bond can be called; Callable bonds will pay a higher yield than comparable non-callable bonds.; A bond call will almost always favor the issuer over the investor; Typically, call options on bonds will be exercised by the issuer when interest rates have fallen. The reason for this is that the issuer can simply issue new debt at a lower rate of interest, effectively reducing the overall cost of their borrowing, instead of continuing to pay the higher effective rate on the borrowings.
      • Solving for the YTC is identical to solving for YTM, except the time to call is used for N and the call premium is FV
    • Floating rate bonds: Coupon rate floats depending on some index value; Coupons may have a “collar” – the rate cannot go above a specified “ceiling” or below a specified “floor”


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