Chapter 6 provides knowledge of bonds, bond prices, and the determination of interest rates. In this chapter, you will understand the relationship between bond prices and interest rates, understand that supply and demand in the bond market determine bond prices, and understand why bonds are risky. | Chapter Six 6- Introduction Car loans, home mortgages, and even credit card balances all create a loan from a financial intermediary - just like government and corporate bonds. Virtually any financial arrangement involving the current transfer of resources from a lender to a borrower, with a transfer back in the future, is a form of a bond. This free flow of resources through bond markets is essential to a well functioning economy. 6- Introduction Alexander Hamilton, the first Secretary of the US Treasury, brought bonds to the . One of his first acts was to consolidate all debt from the Revolutionary War resulting in the first . government bonds. Many features of original bonds are the same, even with a more complex bond market. 6- Goals of the Chapter To understand the financial system, particularly the bond market, we must: Understand the relationship between bond prices and interest rates, Understand that supply and demand in the bond market determine | Chapter Six 6- Introduction Car loans, home mortgages, and even credit card balances all create a loan from a financial intermediary - just like government and corporate bonds. Virtually any financial arrangement involving the current transfer of resources from a lender to a borrower, with a transfer back in the future, is a form of a bond. This free flow of resources through bond markets is essential to a well functioning economy. 6- Introduction Alexander Hamilton, the first Secretary of the US Treasury, brought bonds to the . One of his first acts was to consolidate all debt from the Revolutionary War resulting in the first . government bonds. Many features of original bonds are the same, even with a more complex bond market. 6- Goals of the Chapter To understand the financial system, particularly the bond market, we must: Understand the relationship between bond prices and interest rates, Understand that supply and demand in the bond market determine bond prices, and Understand why bonds are risky. 6- Bond Prices A standard bond specifies the fixed amounts to be paid and the exact dates of the payments. How much should you be willing to pay for a bond? That depends on the bond characteristics. We will examine four basic types. 6- Bond Prices 1. Zero-coupon or discount bond Promise a single payment on a future date Example: Treasury bill 2. Fixed-payment loan Sequence of fixed payments Example: Mortgage or car loan 3. Coupon bond periodic interest payments + principal repayment at maturity Example: . Treasury Bonds and most corporate bonds 4. Consol periodic interest payments forever, principal never repaid Example: . government has some outstanding 6- Zero-Coupon Bonds . Treasury bills (T-bills) are the most straightforward type of bond. Each T-bill represents a promise by the . government to pay $100 on a fixed future date. No coupon payments - zero-coupon bonds Also called pure discount bonds
