Interest Rates and Bond Valuations Essay

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The intent of this paper is to define what bonds are as a vehicle for investors including a detailed explanation of the basic terms associated with bonds, the different types of bonds available in the markets, bond ratings, and why investors might want to consider bond investing to have a more diversified portfolio. Finally, the paper will discuss the relationship between bonds and interest rates in determining bond valuations. Following the discussion there will be a brief summary of the main points explained throughout the paper. Everyone in the investment world is constantly looking for ways to insulate themselves from the volatility surrounding the markets in terms of strategizing investments and diversification. Most investors…show more content…
A bond’s coupons are vouchers attached to the unregistered bond also called a bearer bond (Investor Words, 2014). These coupons are presented to the borrower for an interest-only payment to the lender annually or semi-annually for each payment term until the end of the payment period. This type of coupon is referred to a “level coupon bond” because it pays the same amount to the lender at each pay cycle (Ross, Westerfield and Jordan, 2011). To calculate the coupon payment for a 30 year term the interest rate in this case at 7 percent at which the bond is issued is multiplied by the face value of the bond which is $1000 to get the annual interest-only payment of $70 for the 30 year term totaling $2,100. This is calculated in the example below: .07 x $1,000 = $70 x 30 = $2,100 at the end of the payment period This method of payment is now being replaced by registered bonds which have their interest payments sent directly to the “registered owner” (Parker, 2014). The face value of a bond is its value that is paid at maturity. Most corporate bonds have a face value of $1,000, municipal bonds are valued at $5,000, and government issued bonds are valued at $10,000 (Investor Words, 2014). When a bond is said to have a par value of $1,000 it is the value paid at time of maturity at the end of the bond term usually paid as a ballon payment. Its par value is the same as its face
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