Bonds
The Bonds domain tests fixed income mechanics: how a bond's price is quoted, the difference between coupon and yield, what drives price sensitivity, and how credit quality changes the risk picture.
Structure and issuance
A bond is a loan to an issuer - a government (gilts), a company (corporate bonds), or a supranational - paying a coupon on a nominal (par) amount and redeeming at maturity. UK gilts are quoted per £100 nominal. Conventional gilts pay a fixed coupon; index-linked gilts uplift both coupon and principal by an inflation index, with a lag of several months. Strip gilts separate coupons from principal. Corporate variants include convertibles (exchangeable into shares), perpetuals (no maturity), callable bonds (issuer may redeem early) and floating rate notes, whose coupon resets against a reference rate.
Price, yield and accrued interest
Prices and yields move inversely. The clean price excludes accrued interest; the dirty price adds it, and settlement pays the dirty price. Running (income) yield = coupon ÷ market price. Redemption yield (YTM) also captures the capital gain or loss to maturity. Duration measures sensitivity: modified duration approximates the percentage price change for a 1% change in yield, so duration 7 means roughly 7% price fall for a 1% rise.
Credit
Rating agencies grade issuers; investment grade runs from AAA down to BBB−/Baa3, below which is sub-investment grade or high yield. Credit spreads widen in stress. Rank matters: secured debt ranks above senior unsecured, which ranks above subordinated and additional tier 1 capital.
Worked example
A 5% bond with £100 nominal, five years to maturity, trades at £95 and redeems at par. Running yield = 5 ÷ 95 = 5.26%. The holder also gains £5 of capital. Roughly: annual income 5 plus annualised capital gain 1 gives about 6, divided by the average price of about 97.5, so YTM ≈ 6.2% - well above the running yield.
Traps that cost marks
Treating the coupon as the return. Quoting the clean price at settlement when the dirty price is payable. Forgetting that low-coupon, long-dated bonds carry the highest duration. Assuming a high yield is free money - it usually prices in credit risk.