Posted in Finance, Accounting and Economics Terms, Total Reads: 216
Definition: Fixed-Rate Bond
It refers to a bond whose coupon rate remains fixed over the specified term of the bond. As we know, bond is a form of debt that the company assumes when it has to raise money. A bond can be of various types. Fixed rate bond is one of the simplest kinds of bonds.
Say a bond with maturity in August 2025 is currently trading at 105 and has a annual coupon rate of 5 %. This means it is a 10 year bond with a fixed rate payment of 5%. So to value this bond we will ascertain the cash flows as:
Year 0: -105
Year 1: +5
& so on till
Year 10: +5+100(Principal has been repaid)
In contrast, floating rate bond follows certain metric that decides its coupon rate. Inflation indexed bonds are one of the most commonly known floating rate bonds.