Bond Fundamentals and Pricing › Summary

This chapter established the fundamental concepts for understanding and pricing bonds:

Bond Characteristics: Face value, coupon terms, maturity, payment frequency, and issuer define the payment contract. Low-credit-risk sovereign yields can serve as currency-specific benchmarks; corporate spreads can reflect credit, liquidity, and risk premia.

Pricing Framework: The regular coupon-date model discounts a fixed nonnegative coupon annuity and terminal principal under one stated yield convention. Zero-coupon bonds have one promised principal payment. Dated settlement, credit, and options need additional treatment.

Yield to Maturity: YTM is the price-equating IRR of the promised schedule. It is distinct from realized return, which depends on actual payments, holding period, reinvestment, and costs.

Fixed vs. Floating Rate: Fixed coupons create exposure to discount-yield changes. Floating resets reduce some benchmark exposure, but par at reset requires matching coupon and market valuation assumptions; changes in credit or discount margins still affect price.

Clean and Dirty Prices: In standard cum-coupon settlement, dirty price adds accrued interest to clean price on the same quotation basis. Contractual day-count, record-date, and ex-coupon rules determine the treatment.

Price-Yield Relationship: For positive fixed cash flows without embedded options, price decreases with yield and is convex. Symmetric yield declines and rises then produce asymmetric price changes, with other inputs fixed; this is not a guaranteed investment profit.