Investing in Bonds – Characteristics, Returns, and Pricing Factors

This video covers the following learning objectives:

Describe the characteristics of bonds

• Define what a bond is and how it works as a loan from investor to issuer

• Identify the key components of a bond:

  • Issuer

  • Face Value (Par Value)

  • Coupon Rate

  • Maturity Date

  • Credit Rating

• Recognize different types of bond-related risks:

  • Default Risk

  • Interest Rate Risk

  • Inflation Risk

✅ Example Included:
10-year bond with $1,000 face value and 4% coupon payment illustrating interest income and maturity repayment

Explain how to estimate the return on bonds

• Distinguish between returns from coupon payments and capital gains or losses

• Understand the concept of Yield to Maturity (YTM) as a comprehensive measure of bond return

• Learn how bond pricing below face value increases effective yield

✅ Example Included:
Bond bought for $950 with $1,000 face value and 5% coupon — YTM exceeds 5% due to discounted purchase

Explain how bond prices are determined in the secondary market

• Understand that bond prices fluctuate after issuance based on:

  • Market interest rate changes

  • Credit rating changes

  • Supply and demand

  • Time remaining to maturity

• Learn the inverse relationship between interest rates and bond prices

• Recognize how market perception and credit events impact bond valuation

✅ Examples Included:

• Bond price drops when new bonds offer higher rates

• Credit downgrade reduces price due to higher perceived risk

• Bond price trends toward face value as maturity nears