Question

Define bonds. Explain how bonds are priced. Be dure to provide an example of a bond.

Answer 1

Bonds are fixed-income securities. They are debt securities issued by banks, corporations and governments. Bonds have a maturity date, par value, and may be coupon-bonds or zero-coupon bonds.

Price of a bond is the present value of its cash flows. For a coupon-bond, the cash flows are the coupon payments and the par value receivable on maturity. For a zero-coupon bond, the only cash flow is the par value receivable on maturity.

For example, the 30-year Treasury bond is a coupon bond issued by the Fed, has a par value of $1000 and carries a 2.38% coupon rate and matures in 30 years