Bonds Basics

Coupon Bonds generate Cash Flows (coupons) at Preset Intervals

cash flow c1, c2, c3, c4 etc

are generated at time intervals

time interval t1, t2, t3, t4 etc

Last cash flow is cn+face value of the bond

Face Value of the bond is also called Par or Nominal value or Principal

Maturity Date is the Date contact ends. On or about maturity date, face value of the bond is paid to the Bond Holder by the Bond Issuer

Prior to the maturity, only interest / coupon payments are made.

Vanilla Bond or Bullet Bond is bond is the bond that pays our the Principal only in the end on the maturity date along with last coupon. No amortization.

If coupon is paid several times (k times) a year, the actual coupon that is being paid out at each interval is c/k

Most common coupon frequencies are 1 (Annually) and 2 Semi Annual

Zero Coupon Bonds : are special case that make exactly one payment on the Maturity Date. (Principal + Coupon Amount)

Bond Price is a measure of its economic value

Yield : Yield is a return measure for an investment over a set period of time, expressed as a percentage

Bond Yield or Yield to Maturity of the bond has a direct relationship with Bond Price.

​Price=t−1∑T​(1+YTM)tCash Flowst​​where:YTM= Yield to maturity​


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Yield is inversely proportional to Bond Price

The more the yield the less will be Bond Price

Bond Price vs Nominal Value 

Bond Price > Nominal Value -> Bond is trading at Premium

Bond Price < Nominal Value -> Bond is trading at Discount

Bond Price = Nominal Value -> Bond is at Par

Yield < Coupon Rate -> Premium Bond

Yield = Coupon Rate -> On Par

Yield > Coupon Rate -> Discount Bond

Bond's Dirty Price

A dirty price is a bond pricing quote, which refers to the cost of a bond that includes accrued interest based on the coupon rate.

Remove Accrued Interest from the Dirty Price we have clean Price.

If you're pricing/selling the bond in between coupon dates,  Accrued interest from last coupon to the sale date belongs to the seller and from sale date to next coupon belongs to the buyer.

Day Conventions 

Actual /Actual (Assumes all days in the year 28 or 29 or 30 or 31 days a year)

30/ 360 (Assumes every month has 30 days and 360 days in the year)

30/365 (Assumes every month has 30 days and 365 days in a year)