Bond is a certificate of a loan which can be bought or sold by the investor. When an investor buys a bond, he/she makes a loan to the bond issuer. Bonds CAN be a lower risk investment as compared to stocks.
Maturity:
• specifies period over which interest and principal will be received
• effective return earned (yield) affected by maturity
• Sensitivity of bond price to interest rates depends on maturity
Par value is redemption or face value or principal.
Coupon rate is the rate that determines the periodic interest to be paid of the principal amount. This rate is fixed at inception.
Accrual bonds pay compounded interest but cash payment is deferred until maturity. Coupon formula floater has its coupon rate based on a reference rate (LIBOR) and a quoted margin.
Zero coupon bonds pay no interest and are sold at a discount to par value (difference is interest cost to borrower).
Inflation linked bonds issued by governments
