Bonds and Yield to Maturity

Bonds and Yield to Maturity

Bonds
A bond is a debt instrument requiring the issuer to repay
to the lender/investor the amount borrowed (par or
face value) plus interest over a specified period of
time.
Specify (i) maturity date when the principal is repaid;
 (ii) coupon payments over the life of the bond.

Cash flows in bonds
1. Coupon rate offered by the bond issuer
 represents the cost of raising capital
(reflection of the creditworthiness of the
bond issuer).
2. Assume the bond issuer does not default
or redeem the bond prior to maturity
date, an investor holding this bond until
maturity is assured of a known cash flow
pattern.

Bonds and Yield to Maturity