Bonds from scratch: what the income is made of
beginner
Automated material · TradeAlmanac editorial deskPrepared by a language model from our stored data and checked by an editor.
A bond is a loan. You give money to an issuer, it returns the money at the end of the term and pays a coupon along the way.
Four quantities
Face value — the amount returned at redemption.
Coupon — the regular payment set by the terms of the issue.
Price — what the bond trades at now. It can be above or below face value.
Accrued interest — the part of the coupon accrued since the last payment. The buyer pays it to the seller on top of the price.
Why the yield does not equal the coupon
If you bought below face value, redemption also hands you the difference. If above, you lose it. Yield to maturity (YTM) accounts for the coupons, that difference and the purchase price alike.
It is yield to maturity, not the coupon, that lets you compare two bonds with different terms and different coupons.
What moves the price
Key rate. When it rises, new issues carry larger coupons and older bonds get cheaper to match them on yield. The longer the bond, the stronger the effect — that is what Duration measures.
Prepared by a language model from our stored data and checked by an editor.
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