Question

Respond to the following in a minimum of 125 words:

What is a bond? What types of bonds are there? How are bonds valued? What is the relationship that interest rates have in relation to bond values?

Answer 1

Meaning of Bond: A bond is a loan to a company or government that pays investors a fixed rate of return over a specific time-frame. or in other words,

A bond is a debt instrument that provides a periodic stream of interest payments to investors while repaying the principal sum on a specified maturity date.

Types of Bonds:

• Treasury Securities. Bonds, bills, and notes issued by the U.S. government are generally called “Treasuries” and are the highest-quality securities available.
• Municipal Bonds.
• Corporate Bonds.
• Zero-Coupon Bonds.

Valuation of Bonds: A bond’s price equals the present value of its expected future cash flows from the bond. The rate of interest used to discount the bond’s cash flows is known as the yield to maturity (YTM.). Discounted cash-flow technique is used to value the bonds.

Relationship between Interest rate and Bond value:

• when Interest rise, bond prices fall
• when interest fall, bond prices rise

It implies that there is an INVERSE relationship between interest rate and bond value.