Bonds and Bond Markets: Introduction and Overview

This chapter provides an in-depth analysis of bonds and bond markets. Bonds are the most commonly traded debt instrument. They are typically issued to raise long-term debt financing, and are traded in secondary markets. As debt instruments, bonds have face value, fixed maturity, and coupon payments. Given a required return, bonds can be priced using discounted cash-flow techniques. The return from investing in a bond comes from two sources: coupon yield and capital gains. Given a bond's market price and its other features, the bond's yield to maturity (YTM) can be determined. This chapter describes the pricing/valuation of bonds, bond trading mechanics, and related issues like the yield-to-maturity, the yield curve, nominal and real interest rates, and duration. It also elaborates the bond valuation techniques, the impact of inflation on interest rates, the determination of yields to maturity, interest rate risk, and bond duration.