6.1 Application of the Time Value of Money Tool: Bond Pricing
When companies or governments (federal, state, or local) need to borrow money, they often sell bonds. A bond is a long-term debt instrument by which a borrower of funds agrees to pay back the funds (the principal) with interest on specific dates in the future. If you buy one of these bonds, you are buying a promised future cash flow. We sometimes call bonds “fixed-income” securities because they pay a set amount (fixed cash flow) on specific future dates. Thus, the future cash flow is fixed at the time of initial sale of the bond.
Key Components of a Bond
Although bonds are fairly straightforward financial agreements, bond terminology is quite extensive. Part of the reason for the ...
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