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The Bond Market: An Overview

The Bond Market: An Overview. Jake Caldwell Colgate Finance Club January 30, 2011. What is a Bond?.

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The Bond Market: An Overview

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  1. The Bond Market: An Overview Jake Caldwell Colgate Finance Club January 30, 2011

  2. What is a Bond? • A debt investment (fixed income security) in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. • Bonds are used by companies, municipalities, states and U.S. and foreign governments to finance a variety of projects and activities. -Investopedia.com

  3. The Family of Bonds • Treasuries • Municipal • Agency • Corporate • Residential • Foreign

  4. Terminology Each Bond has the following: • Time to Maturity • Coupon Rate (a.k.a. an interest rate) • Price (market-price) • Principal • Options (call/put)

  5. General Understanding of Pricing • Bonds trade at a price and have a coupon rate. • The coupon rate is determined at the time of purchase. • An investor pays a principal amount. • Bonds expire (mature) on a maturity date. • Holder of a bond receives the coupon semi-annually (but rates are given in annual terms) • When the bond expires, the holder of the bond receives the principal back. • **Price move inversely to interest rates**

  6. Default • Default – when the issuer of the bond does not pay the coupon to the holder of the bond • Risk of default = credit rating (Moody’s) Investment Grade: Aaa – Baa3 Non-investment Grade: Ba1-C1

  7. Other Inherit Risks • Interest Rate Risk • Prepayment Risk • Call Risk • Reinvestment Risk * All of these are reflected in the coupon rate.

  8. Yield Curve • Tells the investor what the price is for taking on more risk

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