Introduction to Corporate Finance MOOC:

Module 3, Bonds
Bond Terminology Yield and STRIPs
Bonds Yield to Maturity -or- Yield (y)
Securities that promise regular payments until a The IRR of a Bond. The rate of return at
final payment date. which the cash flows of the bond must be
Maturity Date discounted to obtain the current bond price.
The final payment date of a bond Bond Price Formula
Coupons
The promised interest payments of a bond. 𝐶𝑜𝑢𝑝𝑜𝑛 𝐶𝑜𝑢𝑝𝑜𝑛 + 𝐹𝑎𝑐𝑒𝑉
𝑃𝑟𝑖𝑐𝑒 = + ⋯+
Coupons are paid throughout the life of a bond. 1+𝑦 (1 + 𝑦)𝑇
Face Value - or - Principal
P = Price
The amount the bond pays back at maturity. This
y = Yield
is in addition to the final coupon that is paid at T = Time to Maturity
maturity. FaceV = Face Value
Coupon Formula
STRIPS
𝐶𝑜𝑢𝑝𝑜𝑛 𝑅𝑎𝑡𝑒 𝑥 𝐹𝑎𝑐𝑒 𝑉𝑎𝑙𝑢𝑒 Zero coupon bonds based on U.S.
𝐶𝑜𝑢𝑝𝑜𝑛 =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑃𝑎𝑦𝑚𝑒𝑛𝑡𝑠 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 government bonds. They are zero coupon
bonds.
Bond Certificate
The document describing the coupon rate, face Yield of a STRIP
value, and maturity date of a bond. 𝟏𝟎𝟎 𝟏
Zero – Coupon Bonds 𝒚𝑻 = ( )𝑻 − 𝟏
A type of bond that pays no coupons. It only pays 𝑷
P = Price
the principal at maturity. y = Yield
Treasury Bills (T-bills) T = Time to Maturity
Bonds issued by the US government with a
maturity of 1 year or less Yield Curve
Treasury Notes
Bonds issued by the US government with a The Yield Curve represents the annual rate of
maturity of 2 – 10 years. Pays semi-annual return an investor can obtain by investing in
coupons. governments securities of different
Treasury Bonds maturities.
Bonds issued by the US government with a
maturity of 10 – 30 years. Pays semi-annual
coupons.
Issuing
The act of selling a security for the first time. The
entity that issues the security is the “issuer.”
Primary Market
The market in which investors buy newly-issued
securities.