A bond represents a series of cash-flows. Investors buying bonds acquire rights to receive those cash-flows at a series of dates – the interest payments during the life of the bond (the coupons) and return of the money at maturity (redemption). For new bonds, buyers and sellers need to agree a price and a yield (discount rate) to arrive at a present value, or price, at which they can transact. The yield is a component of the risk-free rate plus a risk premium (a credit spread). The choice of benchmark hinges on the currency of issue and the conventions that apply to bonds issued in that currency.
Key learning objectives:
How is a bond yield reflected in bond price?
What convention is used in the euro bond market for coupon payments?
How is a bond’s yield to maturity calculated in the euro bond market?
What is Euribor and what is an interest-rate swap curve?
What is the coupon rounding convention in euros?
What is the day-count convention for euros and what is this used for?