Question

In chapter 6, Bond Valuations techniques are introduced A bond is a debt security, like ‘IOU.’ The bond issuers borrow from the Bond Investors. The issuers agree to repay the principal amount of the loan on the maturity date. Thus, a bond represents loans from the holder to the issuer. In this assignment, you are to discuss the following with numerical examples:

1 Explain the concept of Coupon bond yields and its pricing behavior

2 Discuss the ‘Term Structure of Interest Rates’ and how it related to the Yield Curve

3 What are the different shapes of the yield curve

Answer 1

1. A bond coupon is a coupon attached with the bond, so that the payment which have been annually paid by the bond on the face value is determined by the coupon rate.

A bond coupon rate denotes the amount of interest have been paid by the bond Issuer to the bond holder, and these interest are always be paid on the face value of the bonds.

the pricing of these coupon yields are always done keeping in view various kinds of factors-

A. Maturity factor- generally long term bond will have higher coupon rate than short term bond because it is issued in the long run

B. It is also decided upon by the quality of The Bond because it low quality bond will always be having a high coupon rate and higher quality bond will always be having a low coupon rate because of the probability of the default associated with them

C. it is also decided upon by the prevalent market rate at the time of the issuance of the bond because those market rates are an alternative option for the bond holders

D. it is also about other features of the bonds like callable bonds ,convertible bonds so these bonds will have a low coupon rate because of their additional features which have already been embeddedd into them.