2 - Overview of Fixed Income Securities

Abstract

This chapter introduces fixed income analysis, especially the pricing of default-free zero-coupon and coupon fixed-term bonds. A zero-coupon bond makes a single payment on its maturity date, while a coupon bond makes regular interest payments at regular dates up to and including its maturity date. A coupon bond may be regarded as a set of strips, with each coupon payment and the redemption payment on maturity being equivalent to a zero-coupon bond maturing on that date. A zero-coupon bond is the simplest fixed income security. It is an issue of debt, the issuer promising to pay the face value of the debt to the bondholder on the date the bond matures. The majority of bonds in the market make periodic interest or coupon payments during their life and are known as coupon bonds. The coupons have a nominal value that is a percentage of the nominal value of the bond itself, with steadily longer maturity dates, while the final redemption payment has the nominal value of the bond itself and is redeemed on the maturity date.