Summary
Highlights
Once a bond is issued, its face value and coupon rate are fixed, meaning coupon payments do not change regardless of who holds the bond. Bonds can also be bought and sold in a bond market, allowing original lenders to sell their bonds to other investors.
Bonds are a method through which corporations and governments borrow money from investors. Investors (lenders) provide capital to corporations (borrowers) in exchange for promised payments spelled out by the bond document.
The face value of a bond is typically $1,000 for most US corporations. This value plays a critical role in determining the magnitude and timing of cash flows, particularly for the final payment.
The coupon rate is the interest rate a corporation promises to pay investors. For example, an 8% coupon rate on a $1,000 face value bond means an annual coupon payment of $80. The coupon rate and face value together determine the coupon (interest) payments.
The date of maturity specifies when the bond loan will be repaid. If a bond is issued on January 1, 2022, and matures on January 1, 2032, it represents a 10-year loan. This, combined with the issuance date, determines the total loan period.
The time to maturity declines over time. If a bondholder sells a bond after a year, the new holder will receive payments for a shorter period, affecting the bond's price. This will be further explored in subsequent videos.
The video uses Apple bonds as an example, showing that bond issues include information such as coupon rate and time to maturity. For instance, an Apple bond dated August 8, 2022, maturing August 8, 2029, with a 3.25% coupon, means a 7-year loan with annual payments of $32.50 per $1,000 face value. Most US corporations pay semi-annually.
The final part of the video raises the question of what determines the initial price investors are willing to pay for a bond to receive future payments. Factors like yield to maturity, which impacts bond pricing, will be discussed in future videos.
Investors receive annual coupon payments (e.g., $80) for the duration of the loan (e.g., 10 years). At the end of the loan term, when the bond matures, investors also receive the face value of the bond ($1,000).