Financial Engineering Principles
A Unified Theory for Financial Product Analysis and Valuation
Chapter One
Products
This chapter provides working definitions for bond, equity, and currency,
and discusses similarities and differences between bonds and equities.
Perhaps the most basic definition of a bond is that it is a financial instrument
with a predetermined life span that embodies a promise to provide one
or more cash flows. The life span of the security is generally announced at
the time it is first launched into the market, and the longest maturities tend
to be limited to about 30 years.
Cash flows generally consist of periodic coupons and a final payment
of principal. Coupons typically are defined as fixed and regularly paid
amounts of money, and usually are set in relation to a percent of the principal
amount. For example, if the coupon of a bond is set at 8 percent and
is paid twice a year over five years, and if the principal of the bond is valued
at $1,000, then every six months the investor will receive $40.
$1,000 × 8%/2 = $40
A bond issuer is the ... read full excerpt from Financial Engineering Principles: A Unified Theory for Financial Product Analysis and Valuation ebook
