Year 2 · Core Finance · Markets & Instruments
Fixed Income & Yield Curves
Understand how bonds are priced, why coupon and yield differ, how YTM relates to price, and how spot, forward and par curves describe the term structure of interest rates.
LEARNING OBJECTIVES
What you should be able to explain after this lesson
01
Price fixed-rate and zero-coupon bonds from discounted cash flows.
02
Distinguish coupon rate, current yield and yield to maturity.
03
Explain the inverse relationship between bond price and yield.
04
Use spot rates and discount factors to value cash flows at different maturities.
05
Derive simple forward rates from spot rates.
06
Interpret yield-curve shape, steepening, flattening and inversion without treating them as mechanical forecasts.
CONCEPT MAPFrom a bond cash flow to the yield curve
A bond is a contractual package of future cash flows
CORE FACTS · SAME IN EVERY MODE
A plain fixed-rate bond usually pays periodic coupons and repays principal at maturity.
Face value or par value is the contractual principal amount used to calculate coupon payments.
Coupon rate is set contractually and does not automatically change when market yields move.
Maturity is the contractual date at which principal is due, subject to the instrument terms.
BeginnerTeaching style changes, knowledge does not.
A $1,000 bond with a 5% annual coupon pays $50 per year. If it matures in three years, the investor receives $50 in year 1, $50 in year 2, and $1,050 in year 3 if the issuer performs as promised.
FORMULAAnnual coupon
Annual Coupon = Face Value × Coupon RateFor a standard fixed-rate bond, coupon payment is derived from contractual face value and coupon rate.
Worked example
$1,000 face value × 5% coupon = $50 annual coupon.
PROFESSIONAL VOCABULARYFace value / par value / valeur nominale / face value / par value Maturity / échéance / maturity
Contractual principal amount of a bond.
Contractual date at which principal is due.