FINA 385 Lecture Notes - Lecture 5: Yield Spread, United States Treasury Security, Interest Rate Risk
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28 Jun 2016
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Indeed, a company is not obliged to pay dividends and even if it pays them, it may stop doing it in the future. Some stocks do not pay dividends (growth stocks) If bond stops paying coupons, then a borrower breaks a contract and will be in state of default. The coupon rate is the coupon payment divided by the bond"s par value. Bonds that do not pay coupons are called zero coupon bonds (or pure discount bonds) Bond is sold at discount (premium) if its price is smaller (bigger) than the face value. Corporate bonds are typically issued at par value: bond yield is a compensation for risk. Sources of risk in bond returns include but not limited to in ation, business cycle, and default: default is more likely for corporate bonds. The cash ow becomes uncertain when default is possible. Therefore, we assume in this topic that t bills are risky.
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