- I would like to have a better understanding of what bonds are.
Bonds are debt instruments that allow firms to raise funds from investors who subscribe for them. They are characterized by a maturity and a yield based on the issue price and the coupons to which their holders may be entitled. There is a secondary market for most bonds, so that they are an easily realizable investment. Government securities are bonds issued by the Treasury to finance the public debt.
- What is a "callable" bond?
In the case of callable bonds the debtor has the right (not the obligation) to redeem the bonds before their maturity date. For example, a bond with a maturity of 5 years that is callable after the second can last for a maximum of 5 years but the debtor can decide to redeem it after 2 years (naturally paying interests only for the 2 years of the security's actual life).
- What is the coupon?
In the case of a bond, it is the interest (periodic, semiannual or annual) that is paid, as a percentage of the par value. For example, if a bond with a par value of EUR 1,000 has a fixed annual interest rate of 3%, the annual coupon is 1,000 x 3/100 = EUR 30 (gross).
- Reference is made to Euribor: what does it mean?
It is the abbreviation of Euro Interbank Offered Rate, that is the Interbank reference rate of the money market used for the exchange of Euro deposits; Euribor is calculated and published daily by Reuters for the European Banking Federation as the arithmetic mean of a set of "indicative" rates at which a sample of European banks (the reference banks) are prepared to offer deposits.
- What is the difference between price and yield?
The price of a bond loan is its price at issue. It can be at par, below par (at a discount) or above par (at a premium). Yield, instead, means the interest rate that can be determined as the ratio between the value of the coupon and the purchase price of the bond. It should be noted that the purchase price does not coincide with the issue price if the bond is bought in the secondary market.
- What does the yield curve show?
It is the graphical depiction of the yields of bonds with different maturities. The curve is drawn with the residual maturity of each security on the horizontal axis and its yield on the vertical axis. When long-term yields are higher than short-term yields, the curve is called rising; when they are lower, it is called falling or inverted.
- What is the internal rate of return?
It is the discount rate for which the present value of the cash flows generated by an asset is equal to the market price of that asset. Compared with the coupon interest rate, it provides a better and more accurate measure for bonds.
- What does rating mean?
It is the summary judgment that specialized rating agencies assign to a bond and thus to the ability of the issuer to fulfill the payment obligations deriving from the issue. The rating is expressed in letters and symbols when the bond is issued but may be subsequently upgraded or downgraded if the issuer's situation improves or deteriorates. Such changes have a positive or negative impact on the issuer's image and trading in the securities. The best known rating agencies at world level are Moody's and Standard & Poor's. The latter's ratings go from AAA (the highest), AA+, AA, AA- through to D.