Question

The fundamental relationship between a fixed-rate bond’s price and yield that always holds. Features of bonds & definitions of different types of bonds including corporate vs municipal vs government, credit ratings (investment vs. junk), etc.

Answer 1

Answer:

Bond- Is a debt instrument through which investor loans money to the company. Person who has bond, is called Bondholder.

Features of bonds- Are as following:

1. Corporate bonds generally have Par value of $1000.
2. It has coupon rate on its face.
3. It has maturity of 5 years, 10 years, 20, 25 & 30 years.
4. Bond is issued by corporations and Government.
5. Bond is given credit rating by credit rating agencies.

Type of bonds- Are as following:

Treasury bonds- Are the most secured bonds and bills, issued by U.S Government. Interest rate is generally low. Treasury notes and bills have short term maturity of 6 months while treasury bonds have long maturities of 10 to 30 years.

Municipal bonds- Are issued by state and local Government to fund the school, highways, sewer system and other public welfare projects.

Corporate bonds- Are issued by companies to raise the funds. They carry high risk but yield high returns as well.

Zero coupon bonds- Bonds that provide no coupon interest but issued at deep discount.

Junk bonds- Are the bonds that have higher risk of default but provide higher return, issued by companies, seeking quick capital raising.