Bond Basics

Why Issue Corporate Bonds?

Most companies have some sort of bonds where they allow investors to purchase corporate bonds with a fixed rate of return.  This allows the companies to create their own financing without affecting shareholders or going to banking institutions for the money.

What is a CUSIP Number?

What is the Current Yield?

Bond: Definition

A bond is nothing more than an IOU.  You, as the lender of funds, enter into an agreement with an "issuer" of bond securities which entitles you to periodic interest payments, or coupon payments, which will continue for an agreed up on period of time as compensation for the funds b

Fundamentals of Bond Math

To truly understand bonds, you need to have an understanding of a few key metrics that will help you analyze a bond price more accurately. These analytics will be at the base of your analysis.

Bond Ladders, barbells, and bullets are strategies that will help the investor balance their bond portfolios to achieve their desired result. The terminology of these strategies actually reflects the character of that strategy. For example, a bond ladder will enable the bond investor to set up a bond re-investment strategy, in steps. The barbell approach resembles a barbell in that bonds are purchased heavily in the short end and the long end. Medium term notes are left out of the mix.

What does a bond duration measure?

Duration is the weighted average term to maturity of a bonds cash flows and therefore, is a valuable tool in assessing bond price sensitivity to interest rate shocks.

What is a "Coupon"

"Coupon" payments are nothing more than interest payments that the bond holder receives for purchasing a bond. Let's take a look back through history to understand how that term was derived.

What is Convexity?

Remember, as bond yields go higher, price goes lower.  This relationship between price and yield has a convex structure in nature.  The term used to describe this relationship is also known as convexity.  Notice in the diagram below, we have drawn a tangent line a yield Y*.  This tangent line

Yield Curve: Definition

The yield curve represents the relationship between bond yields of similar credit quality but with varying terms to maturity.

Components of Capital Asset Pricing ModelThe Capital Asset Pricing Model (CAPM) is an equilibrium pricing model. The CAPM measures how much a given asset's return is affected by the movement of the overall market. The S&P 500 is often the benchmark index used in the model. The first component of the CAPM is the beta or risk associated with the asset.

Bond Price Fluctuations

Bond price fluctuations can be a result of two