Finance Reading: Introduction to Bonds and Bond Math

This reading covers the basic elements of bonds and introduces some of the analytical techniques used to understand and compare them. It assumes the reader is familiar with the concept of the time value of money (see HBP 8299). The reading provides an economic analysis of simple risk-free bonds, including both zero-coupon and coupon bonds, and extends to bonds with credit risk. The material covers the relationships between prices, yields and maturity and introduces the concept of duration. The reader is introduced to the yield curve and the term structure of interest rates. Selected advanced topics (floating rate bonds, forward rates, evaluating default risk) are included in the Supplemental Reading. The reading concludes with a brief discussion of how the formulas in the reading relate to pre-programmed Excel functions. The reading includes nine interactive illustrations: "Bond Terminology" is a term sheet excerpted from an Apple, Inc. prospectus which familiarizes the reader with bond terminology. "Calculating the Price of a Coupon Bond" calculates the price (present value) of a bond's cash flows, based on reader inputs for maturity, coupon and yield to maturity (YTM). "Inverse Relationship Between Bond Price and Yield to Maturity" demonstrates the inverse relationship between prices and yields. "Historical Yield Curves" is an animated display of the U.S. Treasury yield curve from 1962 to 2015. "Bond Duration" calculates the duration of a bond based upon inputs for maturity, coupon and YTM. "Bond Duration and Maturity" demonstrates the relationship between duration and maturity over a 50-year horizon. "Calculating Bond Duration" is an animated demonstration of how duration is calculated. "Bond Price Sensitivity to Changes in Interest Rate" demonstrates the sensitivity of bond duration to changes in interest rates and maturity.

• Cash flow
• Fixed income securities
• Interest rates
• Profitability