Bonds: Basic Features

Summary

This video provides a clear introduction to bonds, explaining how corporations and governments use them to borrow money. It highlights key features such as face value, coupon rate, and maturity date, which determine the payments investors receive. The bond's face value, typically $1,000, and the coupon rate, which acts as the interest rate, combine to outline the cash flows for lenders. The video also discusses the fixed nature of these payments and the bond market, where bonds can be bought and sold. Through an example of Apple’s bonds, it emphasizes the importance of understanding how bond prices and yields are determined.

Takeaways

• 😀 Bonds are financial instruments used by corporations and governments to borrow money from investors.
• 💰 The face value of a bond is typically set at $1,000, representing the amount to be paid back at maturity.
• 📈 The coupon rate is the interest rate the borrower promises to pay, determining the annual payments to investors.
• 💵 Coupon payments are calculated using the formula: Coupon Payment = Coupon Rate × Face Value.
• 🗓️ The maturity date indicates when the bond will mature, determining the length of the loan (e.g., 10 years).
• 🔄 Once issued, the face value and coupon rate are fixed, ensuring consistent payments to bondholders.
• 📊 Investors can sell their bonds in the market, influencing their pricing and availability.
• ⏳ As time progresses, the time to maturity decreases, which can affect the bond's market value.
• 🍏 Real-world example: Apple's bonds have specific issue and maturity dates, along with set coupon rates.
• 💡 The price of a bond is influenced by current interest rates and the yield to maturity, impacting investor decisions.

Q & A

What are bonds and who issues them?

Bonds are a way for corporations and governments to borrow money from lenders, who can be individuals, accredited investors, or institutions.

What three main features do bonds have that determine payments to investors?

The three main features are the face value, the coupon rate, and the date of maturity.

What is the face value of a bond, and what is its significance?

The face value of a bond is the amount that the issuer promises to pay back to the bondholder at maturity, typically set at $1,000 for many corporate bonds in the U.S.

How is the coupon rate related to bond payments?

The coupon rate is the interest rate that the corporation pays to the bondholders, determining the periodic coupon payments they receive, calculated as a percentage of the face value.

What does a coupon payment of 8% on a $1,000 bond mean?

An 8% coupon payment means that the bondholder will receive $80 annually (8% of $1,000) from the issuer as interest.

What is meant by the date of maturity for a bond?

The date of maturity is the date when the bond issuer must repay the face value of the bond to the bondholders, marking the end of the borrowing period.

How do bondholders receive their payments over time?

Bondholders typically receive annual coupon payments throughout the life of the bond, and the face value upon maturity. For example, with a 10-year bond, they would receive annual payments for 10 years and the principal at the end.

Can bondholders sell their bonds before maturity?

Yes, bondholders can sell their bonds in the bond market before maturity. The new holder will receive the same coupon payments as specified in the bond agreement.

What happens to the time to maturity of a bond as time progresses?

As time passes, the time to maturity declines, meaning that the bondholder will have fewer remaining periods to receive coupon payments and the face value.

How do coupon payments typically work for U.S. corporations?

Most U.S. corporations make coupon payments on a semi-annual basis, meaning bondholders receive half of the annual coupon payment every six months.