Corporate

Corporate Bonds ## Bond Pricing and the Inverse Relationship with Interest Rates Corporate bonds trade in the secondary market at prices quoted as a percentage of par value (par = $1,000 = quoted as 100). A bond quoted at 105 sells for $1,050 (premium); a bond quoted at 95 sells for $950 (discount). The most fundamental rule of bond markets: interest rates and bond prices move in opposite directions. When market interest rates rise, existing bonds with lower fixed coupons become less attractive, so their prices fall. When rates fall, existing bonds with higher coupons become more valuable, so their prices rise. Analogy: Imagine you own a bond paying $60/year (6% coupon on $1,000 par). New bonds now pay $80/year (8%). Nobody will pay full price for yours — they will demand a discount to make up the difference. Your bond's price must fall until its effective yield matches the 8% market rate. Duration measures a bond's price sensitivity to rate changes. Longer maturity and lower coupon = higher duration = greater price volatility for a given rate move. --- ## Yield Types and the Yield Hierarchy Understanding the four yield measures is essential for the Series 7: 1. Nominal Yield (Coupon Rate): The stated annual interest as a percentage of par. A 6% bond pays $60/year on $1,000 par regardless of market price. Fixed for the life of the bond. 2. Current Yield (CY): Annual interest / Current market price. - Example: $60 annual interest / $950 market price = 6.32% current yield - Reflects actual cash income relative to what you paid; ignores price appreciation/discount 3. Yield to Maturity (YTM): The total annualized return if held to…