What is a bond?

Is a practice of consensually tying, and binding. Examples include frogtying.

When an issuer(borrower, debtor) borrows money from a holder(lender, creditor), a debt is created. A bond is just a security form of debt.

Common bonds include government bonds, corporate bonds, and municipal bonds.

A bond is like a legal contract. From the holder’s perspective, they pay a price for this contract, and in return, receive scheduled payments later.

Most bond issuance usually requires collaterals. I mean, why should I trust you? What if you don’t pay me?

You can resell the bond. You might sell the bond for many reasons: short of cash flow, the possibility of counter party default, interest rate change, etc.

Is bond a debt? Not really. You owe money to your credit card issuer but it’s not a bond.

Terminology

Principal:

a.k.a nominal, par, or face amount. The amount that the holder gives to the issuer.

This amount will be paid upon maturity (if it’s not a perpetual bond)

Coupons:

Coupons are the periodic interests paid to the holder. This could be a price for opportunity cost, credit risk, inflation risk, etc.

Period:

This specifies the frequency of coupon payments. e.g. annually, semiannually, monthly…

Term to Maturity

Maturity is the date that the debt terminates → you happy me happy.

Intuitively, term to maturity is the amount of time until the debt expires.

Based on the term of maturity, some bonds may have different names

• 0 yr < M < 1 yr: bills or Williams
• 1 yr < M < 10 yrs: notes
• perpetual: no maturity period, you only pay the interest

Example

A chipmunk borrows $100 from Deez Nuts Bank and the repayment schedule is as follows:

In this case, the principal is $100. The coupon is $2 and paid annually. The term to maturity is 4 years.

Some bonds are simple like the example above — a vanilla bond.

Some bonds can are complicated like zero-coupon securities, callable bonds, CoCo bonds. They will appear in future posts.

We will also cover more analyses like yield calculation and bond price calculation in future posts.

Stay tuned :))