Bonds

Question 1

What is a coupon rate?

Answer 1

Fixed interest rate (percentage of the nominal value) (before the bond enters the secondary market).

Question 2

What is meant by maturity?

Answer 2

Time when the bond is paid back (the full nominal value).

Question 3

What is the nominal value of a bond?

Answer 3

It is the real value of the bond outside of the secondary market’s influence.

Question 4

How do you work out the yield of a bond?

Answer 4

coupon/ market price X 100

Question 5

What is the relationship between the market price of a bond and its yield?

Answer 5

• Inverse

When referring to the calculation for yield, you see that when the fixed coupon rate is divided by a smaller market price it makes the yield increase and the opposite happens if the denominator is a larger market price.