Important Points for IC 99 - Asset Management Exam
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Bonds are fixed income debt instruments, where an investor lends a certain amount of money to another entity and the issuer of the instrument (bond) pays the bondholder a specified amount of interest for a specified time, usually for several years and then repays the bondholder, the face amount of the bond.
A bond is priced using the present value concept, which is based on the theory of time value of money. The fundamental principle of bond valuation is that the bonds value is equal to the present value of its expected (future) cash flows.
Yield to maturity (YTM) measures the annual return an investor would receive if he or she held a particular bond until maturity.
Risks involved in bond investments involve : i. Inflation and rising interest rates risks : Inflation erodes the value of the scheduled fixed payments to bondholders, ii. Default risk : This risk is about the chance that the issuer wont be able to pay off bondholders.
All securities that are awarded a rating of BBB or above are adjudged investment grade. All other bonds are said to have a speculative or junk status.
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