What is a Coupon Bond

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What is a coupon bond?
An investment bond on which interest is paid by coupons.
A coupon payment on a bond is a periodic interest payment that the bondholder receives during
the time between when the bond is issued and when it matures.
Coupons are normally described in terms of the coupon rate, which is calculated by adding the
total amount of coupons paid per year and dividing by the bond's face value. For example, if a
bond has a face value of $1,000 and a coupon rate of 5%, then it pays total coupons of $50 per
year. For the typical bond, this will consist of semi-annual payments of $25 each.
The coupon rate is the yield that the bond pays on its issue date; however, this yield can change
as the value of the bond changes and thus giving the bond's yield to maturity. Bonds having
higher coupon rates are therefore more desirable for investors than those having lower coupon
rates.
What is a fixed payment loan
The amount due every period by a borrower to a lender under a fixed-rate loan. The fixed-rate
loan payments will be equal amounts until the loan plus interest are paid in full. The payment
amount can be calculated using the following formula:

Where:
P is the constant payment you make every period
R is the interest rate per period
N is the number of periods
Loan is the total loan amount
What is the yield to maturity of the bond
The YTM calculation takes into account the bond's current market price, par value, coupon
interest rate and time to maturity. It is also assumed that all coupon payments are reinvested at
the same rate as the bond's current yield.
The rate of return anticipated on a bond if held until the end of its lifetime. YTM is considered a
long-term bond yield expressed as an annual rate. The YTM calculation takes into account the
bond’s current market price, par value, coupon interest rate and time to maturity.
It is also assumed that all coupon payments are reinvested at the same rate as the bond’s current
yield. YTM is a complex but accurate calculation of a bond’s return that helps investors compare
bonds with different maturities and coupons.
What is a discount bond?

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A bond that is issued for less than its par (or face) value, or a bond currently trading for less than
its par value in the secondary market. The "discount" in a discount bond doesn't necessarily
mean that investors get a better yield than the market is offering, just a price below par. A bond
that is issued for less than its par (or face) value, or a bond currently trading for less than its par
value
in
the
secondary
market.
The "discount" in a discount bond doesn't necessarily mean that investors get a better yield than
the market is offering, just a price below par. Depending on the length of time until maturity,
zero-coupon bonds can be issued at very large discounts to par, sometimes 50% or more.
How does interest rate risk depend on the length to maturity?
The remaining life of a debt instrument. In bonds, term to maturity is the time between when the
bond is issued and when it matures (its maturity date), at which time the issuer must redeem the
bond by paying the principal (or face value). Between the issue date and maturity date, the bond
issuer will make coupon payments to the bond holder.
What is interest rate risk?
Interest rate risk is the risk that arises for bond owners from fluctuating interest rates.
Interest rate risk is the risk that arises for bond owners from fluctuating interest rates. How
much interest rate risk a bond has depends on how sensitive its price is to interest rate changes in
the market. The sensitivity depends on two things, the bond's time to maturity, and the coupon
rate of the bond.
Interest rate risk is the chance that an unexpected change in interest rates will negatively affect
the value of an investment.
If the coupon payment of a $1000 face value (par value) is $100 per year and the
bond sells for $1000 what is the yield to maturity?

A simple loan of $100 matures in one year and requires a repayment of $115.
What is the yield to maturity?

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10. What effect will a sudden increase in the volatility of gold prices have on interest
rates?

• Interest rates fall. The increased volatility of gold prices makes bonds
relatively less risky relative to gold and causes the demand for bonds to
increase.
• The demand curve, Bd, shifts to the right and the equilibrium bond price
rises and the interest rate falls.
15. Will there be an effect on interest rates if brokerage commissions on stocks fall?

• Yes, interest rates will rise. The lower commission on stocks makes them
more liquid than bonds, and the demand for bonds will fall.
• The demand curve Bd will therefore shift to the left, and the equilibrium
bond price falls and the interest rate will rise.
18. Predict what will happen to interest rates if the pubblic suddenly expects a
large increase in stock prices

• Interest rates will rise.
• The expected increase in stock prices raises the expected return on stocks
relative to bonds and so the demand for bonds falls.


The demand curve, Bd, shift to the left and the equilibrium bond price falls
and the interest rate rises.

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