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Bonds

A bond is a fixed-income security representing a loan from an investor to a borrower (government or corporation). The borrower pays periodic interest (coupons) and returns the principal (face value) at maturity.

🔑 Key Characteristics

Property Detail
Code in LibreFolio BOND
Pricing Quoted as percentage of face value (e.g., 98.50 = 98.5% of par)
Currency Denominated in the issuance currency
Coupons Fixed or floating rate, paid semi-annually or annually
Maturity Fixed date when principal is returned
Typical providers Yahoo Finance, Scheduled Investment, Manual

📊 Bond Pricing Concepts

💵 Face Value (Par)

The amount the issuer will pay back at maturity — typically $1,000 or €1,000 per bond.

📈 Coupon Rate

The annual interest rate paid on the face value:

\[ \text{Annual Coupon} = \text{Face Value} \times \text{Coupon Rate} \]

📊 Yield to Maturity (YTM)

The total expected return if the bond is held until maturity, accounting for the purchase price, coupon payments, and face value at maturity. The YTM formula is a widely used mathematical approximation of how the market prices bonds in response to changes in interest rates, and serves as the foundation for many other fixed-income metrics:

\[ P = \sum_{t=1}^{n} \frac{C}{(1 + y)^t} + \frac{F}{(1 + y)^n} \]

where \(P\) = price, \(C\) = coupon, \(F\) = face value, \(y\) = YTM, \(n\) = periods.

📉 Dirty vs Clean Price

  • Clean Price: The quoted price, excluding accrued interest
  • Dirty Price: Clean price + accrued interest (what you actually pay)
\[ \text{Dirty Price} = \text{Clean Price} + \text{Accrued Interest} \]

Accrued interest depends on the Day Count Convention.

📈 Price–Yield Relationship

Bond prices move inversely to yields:

  • When interest rates rise → bond prices fall
  • When interest rates fall → bond prices rise

This is because existing bonds with lower coupons become less attractive compared to new bonds issued at higher rates.