In this section, I will discuss bonds. So what's a bond? A bond is a contract that specifies that a borrower owes a certain sum and the dates at which the interest and the principle will be paid. So for example consider a 5-year bond with a face value of $1,000 and a coupon rate of 5%. Let's say for the moment that this is an annual bond. What that means is that 5% of that $1,000 will be paid every year. That's what's called the coupon payment with the $1,000 paid at the end. Why are those payments, which in this case are $50, called coupon payments? So it used to be that when you held a bond, you actually received a certificate. And that certificate came with coupons that you would tear off and mail in and receive, in this case, your $50. So that doesn't happen anymore. But we still call those payments the coupon payments. So we're going to proceed to value bonds in several steps. The first type of bonds we are going to value are called zero coupon bonds. So that sounds complicated. But in fact, these are the simplest kind of bonds. We can think of them as the elementary particles of finance. What these bonds are are a fixed payment at a certain number of years in the future. They're called zero coupon bonds because the coupon rate is zero, they have no intermediate payments. Do such bonds actually trade? Yes they do. And in fact, they have a funny name. They are sometimes called strips. Because what bond dealers do is they take a coupon bond, because virtually all bonds are issued as coupon bonds. And they so to speak strip off the coupon payments and sell them separately. And they also strip off the principal payment. That's why these zero coupon bonds are sometimes called strips. They are sometimes also called discount bonds because as long as the interest rate is greater than zero they will sell at a discount. After we discuss zero coupon bonds and their pricing, we will talk about the returns on these bonds. An alternative name for a bond is a fixed income security. So going back to my first example, that bond had a fixed income of $50 a year. One thing that we will see though is that even though bonds are fixed income securities, they're not fixed return securities. So even for a zero coupon bond, the return may not actually be fixed. So we'll review the distinction between yield to maturity and return on a zero coupon bond. From there, we will move on to the valuation of coupon bonds and to returns on coupon bonds. Then, there's another wrinkle. In fact, almost all bonds are issued bot as annual bonds, but as semiannual bonds. So we'll briefly discuss what wrinkle that introduces into the pricing. Then last of all we will talk about something called the yield curve, namely how yields on bonds relate to the maturity of the bond. Okay, so we're going to start by talking about the simplest kind of bond. A simplest kind of bond sets the coupon payment to equal zero. So the coupon rate is equal to zero. And so what we have is called a zero coupon bond. And the zero coupon bond has a fixed payment, At maturity, and nothing else. You can think about zero coupon bonds as the basic building blocks of all other kinds of securities because it's really the simplest kind of security you could ever think of. You know with certainty what you're going to get and you only have a single payment.