Module 2 · Fixed Income

Fixed-Income Cash Flows and Types

EN: Principal repayment structures, coupon types.
VN: Cấu trúc trả gốc và các loại lãi suất coupon.

1. Principal Structures Concept

Bullet All principal at maturity (most common).
Amortizing Principal repaid over life of bond (mortgages, ABS).
Sinking fund Issuer retires bonds gradually via redemptions.
Balloon Periodic small payments + large lump at maturity.

2. Coupon Types Concept

Fixed-rate Coupon constant for life.
Floating-rate (FRN) Coupon = reference rate + spread.
Step-up Pre-defined increases in coupon over time.
Zero-coupon Issued at deep discount, single payment at maturity.
PIK Payment-in-kind — coupon paid in additional bonds.
Inflation-linked (TIPS) Principal or coupon adjusted for CPI.

3. Contingency Provisions Concept

Call Optional redemption by issuer.
Put Optional redemption by holder.
Conversion Convert into equity.

Practice problem Practice

Practice problem

A 10-year zero-coupon bond has face $1,000 and YTM 4%. Issue price?

Show solution

Price = 1000 / (1.04)\(^{10}\)

= 1000 / 1.4802

≈ $675.56 (deep discount)