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Bonds & Fixed Income Reference Cheat Sheet
A printable reference covering bond prices, coupons, yield, maturity, duration, credit risk, and fixed income basics for grades 11-12.
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This cheat sheet covers the main ideas students need to understand bonds and fixed income investments. Bonds are loans made to governments, companies, or other issuers in exchange for interest payments and repayment of principal. Students need this reference to compare bonds, understand why prices change, and connect investment risk to potential return. It is especially useful for personal finance, investing, and economics units. The most important ideas are face value, coupon payments, bond price, yield, maturity, duration, and credit risk. A basic annual coupon is found with coupon payment = face value × coupon rate. Current yield is found with current yield = annual coupon payment ÷ current bond price. Bond prices and market interest rates usually move in opposite directions, which is one of the key rules of fixed income investing.
Key Facts
- A bond is a loan to an issuer, and the investor receives interest payments plus repayment of face value at maturity if the issuer does not default.
- Annual coupon payment = face value × coupon rate.
- Current yield = annual coupon payment ÷ current bond price.
- If market interest rates rise, existing bond prices usually fall because their fixed payments become less attractive.
- If market interest rates fall, existing bond prices usually rise because their fixed payments become more attractive.
- Yield to maturity is the estimated annual return if the bond is held until maturity and all promised payments are made.
- Longer maturity and higher duration usually mean greater price sensitivity to interest rate changes.
- Higher credit risk usually requires a higher yield to compensate investors for the chance of default.
Vocabulary
- Bond
- A bond is a debt investment where an investor lends money to an issuer in exchange for interest payments and repayment later.
- Face Value
- Face value is the amount the bond issuer promises to repay when the bond reaches maturity.
- Coupon Rate
- The coupon rate is the annual interest rate paid on the bond's face value.
- Yield
- Yield is the return an investor earns from a bond compared with the price paid for it.
- Maturity
- Maturity is the date when the bond issuer must repay the bond's face value.
- Duration
- Duration is a measure of how sensitive a bond's price is to changes in interest rates.
Common Mistakes to Avoid
- Confusing coupon rate with yield is wrong because the coupon rate is based on face value, while yield depends on the price paid for the bond.
- Assuming bonds cannot lose value is wrong because bond prices can fall when interest rates rise or when the issuer becomes riskier.
- Ignoring maturity is wrong because longer-term bonds usually have more interest rate risk than shorter-term bonds.
- Comparing bonds only by coupon payment is wrong because a high coupon may still be a poor deal if the bond price is high or default risk is large.
- Forgetting default risk is wrong because some issuers may fail to make interest payments or repay principal.
Practice Questions
- 1 A bond has a face value of $1,000 and a coupon rate of 5%. What is its annual coupon payment?
- 2 A bond pays 1,200. What is its current yield?
- 3 A 950. Is its current yield greater than, less than, or equal to 4%?
- 4 Explain why the price of an existing bond usually falls when new bonds are issued with higher interest rates.