Bonds

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Bond issuer

Duration

Duration of a bond is the period for which the issuer undertakes the obligation to pay interests (coupons) and repay the principal (face value) at the end (at maturity).

The longer the duration, the more sensitive the market price of the bond to changes in the interest rates on the market. Hence, investors generally expect higher returns for bonds with longer duration. When market participants expect an increase in the interest rates over time, the interest rates are going to be higher for bonds with longer duration than for the short-term ones. Furthermore, the farther the maturity date the more inflation indicators and credit risk analyses influence the market prices. That is why investors (in case of long-term investments) prefer bonds with larger coupons and higher returns.

Short-term investments can be easily withdrawn and reinvested in bonds with more beneficial interests. However, investors interested in long-term deals are tied to the initial interests. The additional compensation on the return is called "liquidity premium" and it is the reason why long-term investments come with higher returns than similar short-term investments.

At maturity, the last cash flow is due, which means the end of the bond’s "life".

In case of perpetuities, the security has no maturity; its duration is infinite. In turn, the face value will never be repaid and the investor’s only source of cash flow is exclusively made up by the perpetual interest payments.

Short-term bonds

Short-term bonds’ maturity is no more than 1 year. There may be bonds with longer maturity than a year, but then shorten their duration to less than a year. These bonds belong to this group.

Medium-term bonds

In this category, the maturity is typically between 1 and 5 years.

Long-term bonds

Long-term bonds are issued with the maturity of at least 5 years.

Perpetuities

Perpetuities have no maturity.

Price of bonds

Face value of bonds

Frequency of interest payments

Country risk

Foreign exchange risk

Sector (industry) related risk

Bond credit rating

Coupons

Bond interest rate

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