Advanced Bond Concepts: Conclusion

Bonds are debt securities in which you lend money to an issuer (such as a corporation or government) in exchange for interest payments and the future repayment of the bond’s face value. Certain bonds are risk-free (many are low-risk), and bonds generally offer predictable income and better returns than other short-term investments.

Here’s a quick review of what we discussed in this tutorial:

• Bonds vary according to characteristics, including the type of issuer, priority, coupon rate and redemption features.
• Bond prices can be either "dirty" or "clean," depending on when the last coupon payment was made and how much interest has accrued.
• Yield measures the income you receive if you hold a bond until maturity.
• Required yield is the minimum income a bond must offer in order to attract investors.
• Current yield is the annual percentage return you get from your initial investment.
• Yield to maturity is the interest rate you get if you invest all coupon payments at a constant interest rate until the bond matures.
• The term structure of interest rates (yield curve) is helpful in determining the direction of market interest rates.
• The yield curve demonstrates the concept of the credit spread between corporate and government bonds.
• Duration is the time in years it takes a bond’s cash flows to repay you the total price of the bond.
• A convex line is formed when the yield and price of a bond are graphed, and this line can show positive or negative convexity.
• Bonds with greater convexity exhibit less volatility when there is a change in interest rates.