Talk:Bond

From Academic Kids

Government savings bonds, which have special features and are not normally marketable, are often confused with regular bonds. Government savings bonds tend to be cashable with the principal fully guaranteed by the issuer. These bonds are traditionally sold through banks. There are no coupons. Discounting is not meaningful because both the principal and accrued interest tend to be payable on demand under certain conditions. The bonds are often available at fixed or variable interest rates. The denominations tend to be small. A Canada Savings Bond may be purchased for as little as $100.

Although there are some exceptions, marketable bonds sold through dealers generally have fixed yields. What fluctuates is the market price, which changes the effective yield. A popular denomination is $1,000 although some dealers might have a higher minimum such as $5,000.

Is there a difference between the par value of a bond and its principal?

Is there a difference between the par value of a bond and its principal?

To my knowledge, principal is usually not used to refer to a bond. This is probably because the price of bond change, varying redemption value exist for some bonds, and the outstanding balance (principal left unpaid) change in case of an amortized bond.

Par is the amount printed on the bond. Voidvector 00:33, Oct 31, 2004 (UTC)

Actually principal is often used to refer to the amortized amount. So if you have a bond that doesn't amortize, Par=Principal, the principal is always the same as the original face value of the bond. But for bonds that can be paid down: Par stays the same (original face value), principal can be paid down (current face value becomes lower than par). When you carry an amortizing bond (like a capitalized lease, or a car payment) on financial statements, you show it's current value as principal+interest owed. This is NOT the same as the present value of the bond which is (price*.01*principal)+accrued interest. tristanreid

Spreads?

Can anyone explain what exactly is meant by the phrase "spreads on corporate bonds"? MartinC

Sure, Martin. Here's an answer, then a more thorough explanation:

Brief answer-The spread is the yield on the corporate bond minus the yield on a similar treasury bond. Bond traders don't want to memorize or figure out what an appropriate yield would be when they trade corporate bonds or different maturities and coupons. It's much easier to just say how close the corporate bond is to a similar treasury bond. The difference between the two is called the spread, and is a measure of the credit risk associated with the corporation that issued the bond.

Longer explanation with the details spelled out-The prices of bonds are determined by how much people are willing to pay for them. The reason that not everyone just goes for the bond with the highest yield is that some bonds are more risky than others. Generally this trade-off gives a direct a risk/return relationship, the more risk on the bond, the more it has to yield for people to buy it, so the cheaper it will be to buy it. All bonds are sensitive to interest rates. So if you have a treasury bond you are mainly exposed to interest rate and reinvestment risk. Treasury bonds are generally considered the safest kind of bond, so there is no credit risk. If you invest in a corporate bond that has the same type of characteristics (maturity, coupon) of a treasury bond, you can assume it has the same amount of interest rate and reinvestment risk, plus some amount (a 'spread') of credit risk. Tristanreid 16:04, 19 May 2005 (UTC)