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Principles of finance Ah la shmoop deconstructing a bond Hello

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You know that song Hello By adele You know you've

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heard it like eight thousand times Hello How are you

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Yeah So think of the you today Wondering whether you

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should loan money to the you of ten years ago

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Hello with you How much And on what terms What

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details would you have wanted to go lean before you

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wrote the check for your hard earned money to risk

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being fully lost on the flaky you of ten years

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ago Okay So dialing it back here The key vocab

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words You must know the key components to a bond

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The principle it's The base amount of a bond loan

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The dollar amount that is loaned before interest and fees

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or commissions or taxes or anything else In the world

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of corporate bonds and most government bonds The base amount

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is usually in multiples of a thousand bucks and for

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larger accounts It's five thousand bucks and these air called

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bond denominations of thousand dollars Five thousand dollars Ten thousand

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a hundred thousand All denominations you know like denomination for

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best bond in a short film category goes to the

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t bill the principal in a mortgage style bond is

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the amount the bank is loaning us You can buy

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your three bedroom picket fence quarter acre house with you

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know basement dungeon dream home you know fifty shades of

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home if you put one hundred grand down and borrowed

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four hundred thousand dollars is your mortgage from the bank

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to pay five hundred thousand dollars for the dream home

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of your life Your loan principal is yes for hundred

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thousand dollars Well in most bond scenarios the principle can

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be and is bought and sold just like any other

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security So in the case of the you loaning money

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teo you let's say the older you realize is that

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you take too much risk in life You followed your

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dreams try to become a rock star rather than listening

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to your nightmares age forty homeless and broke that's how

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you ended up trying to sing So the older you

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cells that bond to someone else who doesn't mind your

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maniacal focus on head banging metal band practice or at

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least unlike the older you doesn't view that as a

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fundamental risk in them paying back the money they borrowed

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Well bonjour typically issued in these thousand dollars based units

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or their par value or face value But they're quoted

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in units of one hundred you know go figure that

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is a bond units selling for one thousand twenty five

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dollars would be quoted as one oh two and a

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half And when you buy the bond you pay one

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hundred three cents on the dollar The cellar of a

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bond gets one Oh two and a half cents on

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the dollar in the fifty cents goes to the agent

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there Got it And i get really technical Bonds are

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usually quoted as a spread like this like a play

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bond issue Here's mr november that is one oh two

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and a half by one of three Which means that

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if you're the buyer of the bond you pay one

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hundred three cents on the dollar And if you're the

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seller of the bond you get one hundred two and

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a half cents on the dollar That's spread which pays

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the person making the market in the bonds or the

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broker is one Oh three Oh minus one o two

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Five equals Yep five bucks So when you do buy

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a bond you'll buy it in one of two ways

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Well in the olden days there were a lot of

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bearer bonds meaning the bearer or the person who had

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the bond in their possession like in their wallet owned

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it's like a built like a paper bill Basically back

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then you could carry around bonds just like they were

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cash and there was no trail in the same way

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There's really no trail on a twenty dollar bill you

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just downloaded from aversa teller atm nonunion robot But because

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barry bonds are really not the best thing to be

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carrying around full that in your wallet the trend quickly

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became to issue new bonds as registered mainly so that

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they could be held elektronik lee and save the murder

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of millions of trees and or sheep Today most bonds

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don't even carry a paper attributes Rather the buyer gets

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an email more or less with a bond registration number

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and those bonds are usually held inside of the buyers

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mutual fund or hedge fund Or if it's a consumer

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buying the bond that number just shows up in their

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fidelity schwab betrayed or other online brokerage account So today

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Bonds don't get a certificate there issued in book entry

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form Will the transfer agents just keep elektronik records of

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the bonds and their little scriven er's ledgers The names

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and addresses and data of the buyer and seller are

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copiously stored But there's no subsequent paper paperwork that goes

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along with it And all of this is really cool

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to now be elektronik But back in the day bonds

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were actually printed in some of the artwork was actually

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pretty cool Note that it's par value is ten thousand

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bucks and it has really pretty borders Ok next big

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element of a bond is the nominal rate Nominal It

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means in name So on the face of the bond

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certificate there will be a named interest rates Take a

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look at this bond right here Jonathan do well here's

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the nominal or face amount And it says four percent

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So this piece paper backed by the company solar city

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now owned by tesla's pays four percent interest Let's pretend

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the bonds a thousand dollar unit Well that means the

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registered owner of this bond is due to be paid

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twenty bucks twice a year or forty dollars a year

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As interest payment on that thousand dollars they're renting So

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the quick summary you buy a bond for twenty five

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thousand dollars that pays eight percent a year and see

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how we're changing this up on you to make life

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difficult The principal's twenty five grand thie interest payment is

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two grand a year or a thousand dollars every six

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months because that's how bond's role they pay interest twice

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a year the nominal rate of the bond maybe eight

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percent But if you had to pay a premium of

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say thirty grand instead of twenty five grand for that

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quote eight percent paper unquote well then you won't actually

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be getting an eight percent return on the thirty grand

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you invested you'll still get the two grand a year

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which is to over thirty or about a six point

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seven percent return If you really want to feel connected

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with dead bad grandpa well you can try to find

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barry bonds which are like old ten thousand dollar bills

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but you'll have a whole lot more love finding a

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wide selection of bonds in the registered aisle of the

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bond grocery store It's schwab's good stuff get the sauce

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