Bonds Essay

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Treasury sector – securities issued by the U.S. government Agency sector – securities issued by federally related institutions and government-sponsored enterprises Municipal sector – securities issued by state and local governments bonds Corporate sector – securities issued in the U.S. by U.S. corporations and foreign corporations Asset-backed sector – securities backed by a pool of assets Mortgage sector – securities backed by mortgage loans 3 types of issuers – fed. Gov.+agencies/ municipal gov./corporations Term to Maturity – refers to the date that the issuer will redeem the bond the bond by paying principal Principal Value – amount that the issuer agrees to repay the bondholder at the maturity date Zero-Coupon Bond – interest is paid at the maturity with the exact amount being the difference between the principal value and the price paid for the bond Coupon Rate – the nominal or interest rate that the issuer agrees to pay each year; the annual amount of the interest payment is called the coupon Floating-rate bonds – issues where the coupon rate resets periodically (the coupon reset date) based on the coupon reset formula given by:reference rate + quoted margin Principal and Coupon Rate LIBOR (London Interbank Offered Rate) – rate at which the highest credit quality banks borrow from each other in the London interbank market. The rate is reported in 10 currencies Linkers – bonds whose interest rate is tied to the rate of inflation Inverse-floating-rate bonds – coupon interest rate moves in the opposite direction from the change in interest rates Amortization Feature – the principal repayment of a bond issue can call for either i.the total principal to be repaid at maturity or ii.the principal repaid over the life of the bond üIn the latter case, there is a schedule of principal repayments called an amortization schedule. üFor

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