Set out the core characteristics of a debt security
The idea
A bond's basic features are its issuer, maturity, par value, coupon rate and frequency, and currency of denomination. Par value is what is repaid at maturity; the coupon rate applied to par sets the periodic interest. Maturity determines how long cash flows continue and drives interest rate sensitivity. The indenture is the legal contract setting out these terms along with covenants — affirmative ones requiring the issuer to act, negative ones restricting it. Bonds may be secured by specific collateral or rank as unsecured claims.
A practice question
The amount a bondholder is repaid at maturity is the bond's:
- par value — correct
- yield to maturityWhy not: A rate of return, not an amount. It is what the bond earns if held to maturity, expressed as a percentage.
- couponWhy not: The periodic interest payment. It is calculated *from* par rather than being the sum repaid at the end.
Par (or face) value is the principal repaid. The coupon rate applied to par determines the periodic interest instead.
A harder one
The legal contract setting out a bond's terms and covenants is the:
- prospectusWhy not: An offering document used to market the issue. It describes the bond but is not the binding agreement.
- indenture — correct
- credit rating reportWhy not: An agency's opinion on creditworthiness. It confers no rights and binds nobody.
The indenture is the binding agreement between issuer and bondholders; a prospectus is an offering document.
The hardest tier
A zero-coupon bond differs from a conventional bond principally in that it:
- repays no principal at maturityWhy not: The principal is the whole of the payoff — the entire return is the gap between the discounted purchase price and par.
- carries no interest rate riskWhy not: It carries *more*, not less. With all the value at maturity and no interim coupons, its duration equals its maturity, which is the longest a bond of that term can be.
- pays no periodic interest and is issued at a discount to par — correct
The return comes entirely from the gap between purchase price and par. Its whole value sits at maturity, which makes it *more* rate-sensitive, not less.
In the app: 18 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
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