key concepts

Bonds: contractual loans to corporations and governments
Coupon payment = coupon rate $\times$ face value
Types
- Corporate: higher coupon rate and longer maturity date
  - Riskier
- Federal government bonds
  - Zero coupon bonds
    - Treasury bills (T-bills): maturity date of 1 year or less
  - Semi-annual coupon payments
    - Treasury notes: 1–10 years
    - Treasury bonds: 10–30 years
  - Interest earned tax free at state level
- State and local government bonds
  - Tax-exempt interest at federal level
Default risk: risk that company or government cannot repay bond
Rating agency: scores entities based on ability to pay debt — AAA, C, and D
Inflation risk
Interest needed = base rate + inflation premium + rating premium + other adjustments
- Base often = interest rate on US-issued debt because thought to be free of default risk

notes

Appeal
- Low-risk fixed income
- Tax incentive for issuing companies
- Help diversify a portfolio
Because considered debt, investors paid before shareholders
If you sell a bond before maturity, you receive fair market value instead of face value
Inverse relationship between current interest rates and fair market value of bonds