2.1 Bond Fundamentals
A bond represents a creditor loan to an issuer. The issuer commits to paying semiannual coupon interest and returning the $1,000 principal at maturity.
Key FINRA Exam Takeaways
- Bonds are debt instruments: par value is universally assumed to be $1,000 unless specified.
- Coupon rate (nominal yield) is fixed for the life of the bond and pays annual interest = Coupon % × $1,000.
- Corporate and municipal bond interest is paid semi-annually and accrues on a 30/360 day-count basis.
- 1 bond point = $10 (1% of $1,000 par). 1 basis point = $0.10 (0.01% or 1/100th of 1%).
- Maturity structures: Term bonds (all mature at once), Serial bonds (staggered maturities), Balloon bonds.
Pricing Quotes and Basis Points
A bond quoted at 98 1/2 is trading at 98.5% of par = $985.00. A quote of 103 1/4 is $1,032.50. 1 basis point (bps) equals 0.01% in yield. A change from 5.25% to 5.75% is an increase of 50 basis points.
Accrued Interest Calculations
Corporate and municipal bonds calculate accrued interest using a 30-day month and 360-day year (30/360). Accrued interest is calculated from the last interest payment date up to, but NOT including, the settlement date (T+1).
Knowledge Checkpoint • Section 2.1
A corporate bond with a 6% coupon is quoted at 95. What is the annual interest dollar amount paid to the bondholder, and what is the current market purchase price?