Debt Fundamentals and Bond Pricing
Key terms and calculations for bond par value, pricing, accrued interest, and the price-yield relationship.
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Questions Covered in This Set
12 cards to master
Par value (assume what amount on the SIE?)
The principal returned at maturity — assume $1,000 par for corporate and municipal bonds.
Coupon rate (nominal yield)
The fixed annual interest rate stated as a percentage of par; never changes on a fixed-rate bond. A 6% bond pays $60/year, or $30 semiannually.
How are bond prices quoted?
As a percentage of par. A quote of 98 = $980; 101½ = $1,015. Treasury notes/bonds are quoted in 32nds (99.16 = 99 16/32 = $995).
Inverse price-yield relationship
Bond prices and yields move in opposite directions. Rates rise → prices fall; rates fall → prices rise.
Discount bond vs. premium bond
Discount: price below 100, yield > coupon (rates rose). Premium: price above 100, yield < coupon (rates fell).
N-C-Y-M memory device
For a discount bond the yields ascend: Nominal < Current yield < Yield to maturity < Yield to call. Reverse the order for a premium bond.
Accrued interest
Interest earned by the seller but not yet paid; the buyer reimburses it. Clean price + accrued interest = dirty price (total settlement amount). Accrues up to but not including settlement.
Day-count conventions
Corporate and municipal bonds: 30/360. Government/Treasury bonds: actual days / actual year.
Compute accrued interest: 6% corporate bond, last coupon Jan 1, settlement Feb 16
45 days accrued (30 + 15). $60 ÷ 360 = $0.1667/day × 45 = $7.50. Buyer pays $1,007.50.
Which bonds trade flat (without accrued interest)?
Defaulted bonds and zero-coupon bonds.
Zero-coupon bonds
Pay no periodic interest; sold at a deep discount and mature at par. All return is accretion, and they carry the greatest interest-rate (price) risk.
Bondholder rights vs. stockholder rights
Bondholders are creditors: fixed interest, return of principal, and priority over stockholders in bankruptcy — but no voting rights, dividends, or share of growth.
