Chapter 5: Fundamentals of Debt

Chapter summary

Chapter 5 covers how bond prices and yields interact. When market rates rise, bond prices fall — and the reverse. Know the three yield measures: nominal (coupon), current yield, and yield to maturity. For a discount bond, coupon < CY < YTM; for a premium bond, the order reverses. Duration measures price sensitivity to rate changes. Zero-coupon bonds accrete toward par, with annual imputed interest taxed even though not received.

Key concepts

• Fixed-Income Securities
• Why Bond Prices Fluctuate from Par
• Bond Pricing
• Prices and Yields: An Inverse Relationship
• Redeeming Bonds
• Tax Issues Associated with Debt Securities
• Fixed-Income Securities
• Why Bond Prices Fluctuate from Par
• Bond Pricing
• Prices and Yields: An Inverse Relationship
• Redeeming Bonds
• Tax Issues Associated with Debt Securities

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