When the bond is issued, an interest rate is set that is usually paid to creditors annually (or semi-annually in the case of US securities). Bonds with a fixed coupon are also called straight bonds.

How does the price of a fixed coupon bond behave?

When a bond is issued, the interest coupon is at the market level for bonds otherwise with the same features. Ideally, therefore, the bond is quoted at exactly 100 per cent of its face value at the time of issue. If prices subsequently fall (i.e. yields rise) on the bond market, the price falls below the nominal value (below par) and vice versa. Rising prices, on the other hand, are congruent with falling yields. If the price rises above the nominal value, a bond is quoted "above par" according to the jargon.

General market risk and issuer risk

The development of interest rates is one of the general market risks. Investors who hold bonds to maturity can ignore the interest rate risk as long as the repayment of the nominal value and/or the current interest payments are not at risk. The risk of default assumed by the market is also reflected in the coupon, yield and price.

If the market demands a higher interest rate from a particular company, industry or country already at the time of issue, this is reflected in a higher coupon. The market demands higher interest rates if the risk of default is higher compared to government bonds of very stable countries like the FRG. Therefore, most issuers on the bond market have to accept "spreads" on the yield. Spreads are the premiums over bonds classified as safe.

Fixed coupon and interest rate risk

An assumed higher default risk can be directly or indirectly related to the issuer. Here is explanation and its translation from Thai traders: มีความเสี่ยงโดยตรงหาก บริษัท หรือรัฐกําลังดิ้นรนกับปัญหาคอขวดทางการเงินภาวะเศรษฐกิจตกต่ําเป็นต้น. ความเสี่ยงของการผิดนัดไม่เกี่ยวข้องโดยตรงกับผู้ออก. ความเสี่ยงทางอ้อมมีอยู่หาก บริษัท ที่มั่นคงได้รับภาระจากการผิดนัดชําระเงินในอุตสาหกรรมของตนเองหรือออกพันธบัตร บริษัท เป็นสกุลเงินที่ ดาวน์โหลด mt4 exness ที่สามารถจําแนกได้ว่าเป็นความเสี่ยง.

A direct risk exists if a company or a state is foreseeably struggling with financial bottlenecks, economic downturns, etc. The risk of a default is not directly related to the issuer. An indirect risk exists if, for example, a solid company is burdened by payment defaults in its own industry or a corporate bond is issued in a currency that can be classified as risky.

Bonds with variable interest rates

Bonds with variable interest rates offer debtors and creditors attractive structuring and diversification options. In contrast to straight bonds, the interest rate on floating rate notes is not fixed at the time of issue, but is linked to a reference interest rate.

The applicable reference interest rate as well as the cut-off date applicable for a specific interest date are specified in the bond terms and conditions. Common market reference interest rates are e.g. LIBOR and EURIBOR. Typically, it is determined that the bondholders will be paid the reference interest rate plus a fixed premium of e.g. 1.00 per cent.

The interest rate risk is reallocated

In contrast to fixed-rate bonds, floating-rate coupons result in a reallocation of the interest rate risk. Investors benefit from rising market interest rates during the term, but have to accept a loss of interest income when interest rates fall. Issuers face a mirror image risk.

The variable interest rate eliminates the main part of the price risk - which is due to changes in the market interest rate. The prices of bonds with fixed interest rates fall if the market interest rate rises after the issue - in this way the investment adjusts to the changed conditions. With a variable interest rate, such an adjustment is no longer necessary. Price risks with EUR-denominated floating-rate bonds therefore exist primarily in connection with the creditworthiness of the issuer.