Bond
- Used by issuers, often governments, to raise money
- Is the right to earn returns of a loan
- Loan principle is the issue price, set by the issuer upon issue / initial sale
- Annual interest rate is the coupon rate, set by the issuer upon issue / initial sale
- Loan maturity is the bond maturity
- Buying / selling a bond post-issuance influences the calculated yield of the bond
- Yield is the effective return an investor sees from the loan: a function of the coupon rate and how much they bought the bond / loan for
Price-Yield Relationship
Bond price and yield are inversely correlated.
Coupon rate is set at issuance, but price (and thus yield) changes according to market behaviors.
Price,Coupon Rate (5% of issuance price),Yield,Description
"$1,000",$50,5%,Issuance
$900,$50,5.56%,
"$1,100",$50,4.5%,