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All About Bonds Bond valuation is defined as the determination of the fair price of a bond. Yield-to- maturity (YTM) is the discount rate at which the sum of all future cash flows from the bond equals the bond's price. YTM is the return earned by an investor who purchased the bond at market price. This is assuming the bond will not be turned in until it reaches maturity and that all payments are made according to the schedule. (Valuing Bonds | Boundless Finance, n.d.) One simple reason is that long-term bonds are usually subject to a greater interest rate risk than short-term bonds. There is a greater chance that the interest rate will rise within a more extended period than within a shorter period. As a result, investors who buy long-term bonds and want to sell before the maturity date may have to deal with discounted market prices when they want to sell. Unlike short-term bonds, the risk is significantly less because interest rates are not likely to change quickly, making these short-term bonds easier to retain until maturity. (Gallant, 2021) A call provision is a clause in the contract for a bond that allows the issuer to repurchase, called a callable bond. If a bond is called, as an investor, you would be paid any accrued interest as detailed within the call provision clause. The investor will also receive a return on their invested principal. A callable bond's price equals the bond's price after subtracting the call option's price. The price of a callable bond is "generally lower than the straight bond price because the option to call adds value to an issuer" (Key Characteristics of Bonds | Boundless Finance, n.d.). A put provision is a clause in the bond agreement that "allows a bondholder to resell a bond back to the issuer at face value after a specified period but prior to the maturity date" (Chen, 2021). A put provision protects the bondholder like the call provisions protect the bond issuer. Usually, when a bond is purchased, the issuer will put specific dates in the clause. On these dates before the maturity date, a bondholder may revalue their investment. As with the call provision, the bondholder will not receive the total return when utilizing this provision. The bond issuer decides the coupon rate based on the current market rates. Interest rates evolve and change over time, going higher and lower. When this happens, the bond value also increases and decreases. The required rate of return is defined as the rate that investors are willing to accept and is often referred to as the yield to maturity (YTM). YTM is the amount assumed if an investor holds an asset to maturity. It is the amount of all remaining payments. A bond's YTM increases and decreases depending on the market value and how many outstanding payments remain. The coupon rate is the yearly interest the bond owner will receive. (Hayes, 2021) Premium and discount are used when discussing bond values; they are told that the bond's price is either above or below its par value. For example, if a bond with a par value of $2,000 can be bought for $2,700, it is selling at a premium because it can be bought for more than $2,000. If that same bond can be bought for $1500, that is at a discount. These values fluctuate because of changing interest rates. The current yield of a bond is defined as the annual income on an investment. This includes interest and dividend payments; these are then divided by the bond's current price. This formula is focused on the purchase price rather than par value; it closely reflects the profitability of the blond. This will allow investors to consider which bonds generate great returns accurately. As discussed earlier, yield to maturity is the total return on a bond that is held until its maturity date. When a bond's market price is premium, its current yield and YTM are lower than the current coupon rate. In contrast, when a bond is valued and sold for less than par or a discount, its current yield and YTM are higher than the coupon rate. On occasions when a bond sells for its exact par value, are all three rates the same? (BLOOMENTHAL, 2020). References

BLOOMENTHAL, A. (2020, December 10).Current yield vs yield to maturity. Investopedia.https://www.investopedia.com/ask/answers/072915/what-relationship-between-current- yield-and-yield-maturity-ytm.asp Chen, J. (2021, February 16). Put Provision Definition. Investopedia.https://www.investopedia.com/terms/p/put-provision.asp#:%7E:text=Key%20Takeaways-,A %20put%20provision%20allows%20a%20bondholder%20to%20resell%20a%20bond,is%20to%20the %20bond%20issuer. Gallant, C. (2021, January 11).Interest Rate Risk Between Long-Term and Short-Term Bonds.Investopedia. https://www.investopedia.com/ask/answers/05/ltbondrisk.asp#:%7E:text=Interest %20Rates%20and%20Duration,-A%20concept%20that&text=There%20are%20two%20primary %20reasons,than%20within%20a%20shorter%20period . Hayes, A. (2021, March 25).Yield to Maturity vs. Coupon Rate: What is the Difference?Investopedia. https://www.investopedia.com/ask/answers/020215/what-difference-between-yield-maturity-and-coupon- rate.asp Key Characteristics of Bonds | Boundless Finance. (n.d.). Lumen Learning. Retrieved April 4, 2021, from https://courses.lumenlearning.com/boundless-finance/chapter/key-characteristics-of-bonds/ Valuing Bonds | Boundless Finance. (n.d.). Lumen Learning. Retrieved April 4, 2021, fromhttps://courses.lumenlearning.com/boundless-finance/chapter/valuing-bonds/

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