4.0 Introduction
Chapter Learning Objectives
By the end of the chapter you should be able to:
- Define terminology used in bonds and bond transactions
- Calculate the purchase price of a bond on an interest payment date
- Calculate the yield to maturity of a bond on an interest payment date
- Calculate the investor’s yield when a bond is sold before maturity
- Construct an amortization of the premium bond schedule
- Construct an accumulation of the discount bond schedule
- Calculate the purchase price of a bond on a non-interest payment date
- Calculate the quoted price of a bond
- Construct a sinking fund schedule
One of the most powerful ways for an institution to raise large amounts of capital is by issuing marketable bonds. A company or a government will essentially borrow the required financing from investors such as you and me. Individually we cannot provide the needed funds, but the bond issuer can raise a large sum of money from us collectively. One of the largest bond issuers in Canada is the Government of Canada. This money is primarily used to fund Canada’s national debt.
On the consumer side, marketable bonds represent another investment opportunity you can include in your RRSP portfolio. They feature regular interest payments and a chance to grow your savings through trading on the bond market. This chapter begins with the basics of how bonds operate. Then you will learn how to calculate the purchase price of a bond and work with bond interest rates. Bond issuance usually comes with a sinking fund provision. Finally, we will explore the financial and accounting responsibilities associated with amortization of bond premiums and accrual of bond discounts.
Attribution
“4.0 Introduction” from Financial Math – Math 1175 by Margaret Dancy is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.
