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1. Explain the following terms related to bonds: a) face value (or par, principal, nominal value)...

1. Explain the following terms related to bonds: a) face value (or par, principal, nominal value) b) coupon c) yield d) maturity e) indenture f) price

Solutions

Expert Solution

  • Face value of the bond: face value is also known as the par value is equal to the price of the bond when it is first issued. But the price of the bond would change later depending upon the market conditions in accordance with changes in interest rates while face value remains fixed.
  • Yield: bond yield is defined as the return that an investor would realize on the bond. It can also be defined in different ways. The current yield is the function of bond’s price & its coupon or interest payment which would be more accurate than the coupon yield if the price is different from its face value.
  • Coupon: coupon in bond refers to the payment the bondholder receives from the issue date of the bond till its maturity. They are normally described in terms of coupon rate & is calculated by adding sum of coupons per year divided by its face value.
  • Maturity: With bonds, term to maturity is the time between when the bond is issued and when it matures, known as its maturity date, at which time the issuer must redeem the bond by paying the principal or face value.
  • Indenture: it is defined as the formal contract between the issuer of the bond & the bond holder. It sets the details of terms & conditions of the bond such as day of maturity, timings of interest payments & details of any special features.
  • Price: the price usually responds to changes in the interest rates in the economy. The price of the bond depends on its characteristics. It keeps changing on daily basis & it is supply & demand the determines the price.

jeff jeffy answered 1 year ago
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