Bond Fundamentals and Pricing › Key Parameters
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The key parameters for bond pricing and analysis are:
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Face Value (F): The principal amount repaid at maturity. Sets the baseline for calculating coupon payments and determines the bond's par value.
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Coupon Rate (c): Annual fixed coupon divided by face value. At matched maturity, yield, and convention, higher coupons reduce percentage yield sensitivity; dollar sensitivity need not decline.
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Years to Maturity (T): Time until final principal is due. In the regular schedule, is an integer period count. Maturity is one determinant of sensitivity, together with coupon, yield, and contractual terms.
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Yield to Maturity (y): The rate equating the promised schedule's present value to price. Its compounding and settlement convention must be specified; the quote is not a guaranteed realized return.
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Payment Frequency (m): Number of coupon payments per year. Affects compounding calculations. Semiannual payments use y/2 as the periodic rate.
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Reference Rate: For floating rate bonds, the benchmark rate (e.g., SOFR) that determines coupon resets. Changes in this rate directly affect future coupon payments.
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Spread: Distinguish the contractual margin used in the floating coupon from the current market-required discount margin. A fixed contractual margin need not equal the margin investors require later.