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Alternate Types of Investment - Bonds Everything on bonds, including calculations and examples

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Wilfrid Laurier University
Jim Mc Cutcheon

L4BU11112102011 Alternate Types of InvestmentsBondsA bond is a promise by the issuer or borrower to repay the investor a set dollar amount principalat a set date maturity and to pay the investor a fixed rate of interest coupon rate each year Maturity Date2030Issuing comp ABC 10 of 30borrowCoupon RateFace value 1000 x 10100yrCharacteristics of All BondsFace ValueoMost Bonds are initially sold at a face value of 1000 per bondLength of LifeDate of Final MaturityoMost Bonds have a relatively long life from the time they are initially sold issued until the time that they mature date of final maturityoThis is referred to as the bonds run to maturity or life expectancyoHowever some bonds may have a longer run to maturity 30 years or a shorter run to maturity 10 or 15 yearsoFor the sake of simplicity we will always assume that a bond will have a run to maturity of 20 years 90 of real life ones are 20 yearsDate of final MaturityoAt the end of its life borrower will return the 1000 to lenderCoupon Rate oEach year the owner of a bond will receive a fixed rate of interest from the issuer of the bondoThe amount of interest received annually is determined by the following formulaiAnnual interestcoupon rate x face value 1000oAn investor will never receive anything more than this amount of interest but will also never receive anything less than this amountIf the issuer of a bond fails to pay the required amount of interest to the investor it is considered to be an act of bankruptcyThe bondholder can then take action to force the company to liquidate its assets and use the proceeds to pay their outstanding claims all interest owed plus full repayment of the principal loanedThis is how this occursoThe Bond Indenture contract
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