If you sell this bond in exactly one year, having paid $1,000, and received exactly one coupon payment, what is your total return if competing yields are 12%?
Your total return is -6.70%
In the world of finance, a bond is a kind of security where the issuer (debtor) owes the holder (creditor) a debt and is required, depending on the terms, to repay the principal (i.e., amount borrowed) of the bond at the maturity date as well as interest (called the coupon) over a certain amount of time.
Semiannually, annually, and less frequently at other times, the interest is typically due at set intervals. Consequently, a bond is a type of borrowing or IOU. Bonds give the borrower access to external capital for financing current expenses or, in the case of government bonds, long-term investments.
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