Chapter 28, Part II. Relation with Other Financial Markets. Page 2

Let’s suppose that you’ve bought US Government bond with principal value of 100K and coupon yield 5%. Coupon yield always shows annual rate. It means that if you will hold this bond for 1 year, you’ll get 5%*100K = 5K. Since the US Government makes coupon payments semiannually – you’ll get 2.5K after 6 months and another 2.5K at the end of the year. In fact, your yield will be a bit greater, since you may reinvest the first 2.5K at some yield, but this is a bit of an advanced conversation, so we will skip it.

The third important parameter is the term of the bond. Term shows how long a time the bond will give you coupon payments and when you will get the notional amount back. What your buddy tells you, if you ask him to return 100 bucks?

Pipruit: Hm, probably he will say, that will try to return on next week but not sure about it…?​

Commander in Pips: The most common approach to this is to use not just one but two MAs on the chart.

Pipruit: And what it could give us?
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Commander in Pips: Right, but bond has a strictly predefined maturity date and you know it right at the moment of issuing of the bond. Say, a 10 year US Treasuries bond, issued 01/01/11 will be matured at 01/01/21 and during this term you will get 20 semiannual coupon payments of 5K (if the rate is 5%) plus notional amount that you’ve lent initially – 100K.

The next two parameters are more complicated. They are Price and yield to maturity (YTM) of the bond. Price is relatively simple and it’s measured in percents from notional value. If Price = 100% it means that you have to pay the notional amount – 100K. If price = 85%, then it will be 100*0.85 =85K USD, Price = 120%, then it will be 120K USD.