Module III·Article I·~3 min read
Bond Structure
Fixed Income: Foundation Level
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Bond Structure
Anatomy of a Bond
A bond is a debt security by which the issuer undertakes to pay the holder regular interest (coupons) and to return the principal sum (face value) at the maturity date. Bonds are the backbone of institutional portfolios and represent the largest asset class in the world ($130+ trillion).
Key Bond Parameters
| Parameter | Description | Example |
|---|---|---|
| Face/Par Value | Amount the issuer will return at maturity | $1,000 (corporate standard) |
| Coupon (Coupon Rate) | Annual % of face value | 5% = $50/year |
| Coupon Frequency | How often it is paid | Semiannual (US), annual (EUR) |
| Maturity | Time left until principal is returned | 10 years |
| Price | Current market value | 98.5 (% of par = $985) |
| Issuer | Who issued the bond | US Treasury, Apple Inc., Germany |
| Rating | Creditworthiness assessment | AAA, BBB, BB |
Pricing: Premium, Discount, Par
| Situation | Price | Reason |
|---|---|---|
| At Par | 100 | Market rate = coupon |
| Premium | > 100 | Market rate < coupon (bond is attractive) |
| Discount | < 100 | Market rate > coupon (bond is unattractive) |
Bond Yield Measures
| Metric | Formula | Application |
|---|---|---|
| Coupon Rate | Coupon / Face Value | Stated (nominal) rate |
| Current Yield | Coupon / Market Price | Current yield |
| YTM (Yield to Maturity) | IRR of all cash flows | Total yield if held to maturity |
| YTC (Yield to Call) | IRR to call date | For callable bonds |
| YTW (Yield to Worst) | min(YTM, YTC, ...) | Conservative estimate |
Example YTM Calculation
Bond: face value $1,000, coupon 5%, price $950, 5 years to maturity.
YTM ≈ 6.1% (solved numerically or with a financial calculator)
Current Yield = $50 / $950 = 5.26%
YTM > Current Yield because we will also earn $50 of capital gain ($950 → $1,000).
Types of Bonds by Issuer
| Type | Issuer | Risk Level | Examples |
|---|---|---|---|
| Government | Governments | Minimal (for DM) | US Treasuries, German Bunds, JGB |
| Agency | Government agencies | Low | Fannie Mae, Freddie Mac |
| Municipal | Local governments | Low to medium | California GO Bonds, NYC Bonds |
| Corporate IG | Companies rated BBB+ | Medium | Apple, Microsoft, J&J |
| Corporate HY | Companies rated BB or below | High | Netflix (until 2021), Tesla (until 2020) |
| EM Sovereign | EM governments | High | Brazil, Mexico, Indonesia |
Clean Price vs Dirty Price
- Clean Price — quoted price without accrued interest
- Dirty Price (Invoice Price) = Clean + Accrued Interest
Accrued Interest — the coupon portion accumulated since last payment
The buyer pays the Dirty Price; the seller receives compensation for the "earned" interest.
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Fixed Income: Foundation Level
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