Market insight
How interest-rate cycles affect debt funds
Debt funds respond to rate cycles through duration, accrual and credit spreads. An evergreen guide to what moves them — with no forecasts.
4 min read
Topic4 pieces · 11 terms
Bonds, from coupon to yield
A bond is a loan you make to an issuer in return for scheduled interest (the coupon) and your principal back at maturity. Its price can change before then, mostly because interest rates and the issuer’s credit quality change — which is why yield, duration and ratings are worth understanding.
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A credit rating is an opinion on the likelihood of timely repayment. It is useful, standardised and fallible. Here is how to read one.
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Bonds 101: coupon, price and yield
A bond’s coupon is fixed; its price and yield are not. Understanding how the three relate is the foundation of fixed-income investing.
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Glossary
Key terms
The words you’ll meet most often in this topic, defined in a sentence. Each links to the full definition.
Coupon
The interest a bond pays its holder, stated as an annual percentage of the bond’s face value and paid on fixed dates.
YTM
Yield to Maturity
The annualised return on a bond bought at today’s price and held to maturity, if every payment arrives as promised and coupons are reinvested at that rate.
Face value
The nominal amount of a bond — what the issuer repays at maturity and the base on which coupon payments are calculated.
Current yield
A bond’s annual coupon divided by its current market price — a quick measure of income relative to what you pay today.
Duration
The weighted average time, in years, to receive a bond’s cash flows — and a guide to how sensitive its price is to interest rates.
Modified duration
An estimate of how much a bond’s price changes, in percent, for a one percentage point change in interest rates.
Credit rating
A rating agency’s opinion of how likely a borrower is to pay interest and principal on time, on a scale running from AAA down to D.
Accrued interest
Interest a bond has earned since its last coupon date but not yet paid; a buyer usually pays it to the seller on top of the quoted price.
Zero-coupon bond
A bond that pays no periodic interest; it is bought at a discount to face value and repays the full face value at maturity.
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When you buy a bond, you lend money to the issuer — a government, public sector body or company. In return, the issuer usually pays a fixed coupon on set dates and repays the face value at maturity. Your return depends on the price you pay, the coupons you receive and whether the issuer pays as promised. YTM brings these together into one annual figure.
When market rates rise, new bonds offer higher coupons, so existing bonds with lower coupons are worth less to buyers; their prices fall until their yield matches the market. The longer a bond’s duration, the bigger the effect. If you hold a bond to maturity and the issuer pays as promised, these interim price moves don’t change what you receive at maturity.
A bond is a single loan with a fixed coupon schedule and maturity date; held to maturity, its cash flows are known as long as the issuer pays. A debt fund holds many bonds and money-market instruments, usually has no maturity date of its own, and its NAV moves every day with interest rates and credit events. Funds offer diversification and easy redemption; individual bonds offer predictable cash flows. Their tax treatment differs too.
A credit rating is a rating agency’s opinion of how likely an issuer is to pay interest and principal on time. Long-term ratings run from AAA, the highest safety, down to D, which indicates default. Higher-rated bonds usually offer lower yields. Ratings can change, and they don’t cover interest rate or liquidity risk, so read the rating rationale and not just the letter grade.
That depends on which products CompoundX has enabled with regulated partners. Where bonds are available, the Bonds page explains how to proceed; otherwise you can register your interest and a relationship manager will get in touch. Either way, the Bond Yield & Cashflow tool shows a bond’s coupon schedule and approximate yield before you decide anything.
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