7. What are the components of a bond

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In this lesson, we first learned about the primary components of a bond. We learned that the par value or face value is the price the bond was originally issued for. It's also the price that will be repaid to holder of the bond when it matures.
The next component we learned about was the coupon. The coupon is the amount of money that the bond holder will receive from the issuing company for what every rate the bond specifies. For example, if a $1,000 par bond pays a $25 coupon biannually. The investor (or bond holder) can expect a 5% return on their money. This would be determined by summing the two coupon payments for the year and then dividing the annual coupons by the par value.
The last component we learned about was the term of the bond. Just like a standard loan, borrowed money has a term in which the loan will be repaid. This duration is called the term.
After a bond is issued, the owner of the security (or bond) has the ability to sell the bond on a market. When the owner attempts to sell the bond, the price at which they offer to sell the investment is called the market price. Since the value of a bond is inversely proportional to current interest rates, the market price of a bond will increase as interest rates decrease, and vice versa. More information on basic valuation techniques are taught in the following lesson.

[@jingwu2072]

Never has anyone explained these concepts so clearly. Thank you and would recommend others!

[@Pyschocrap]

The market price of a bond is calculated with the following formula: P = C x [1-(1/1+i)^n]/i + B/(1+i)^n where P = market price C = yearly coupon you get paid (so par value x coupon rate) i = interest rate B = par value that you get paid back whenever the bond matures n = years till maturity Hope this helps

[@MrAndersJensen]

Thanks man 🙏

[@cathleensetiono9317]

Hi Mr. Pysh !, I'm actually a 16 years old girl who wants to be a great entrepreneur and a good investor. Thank you for teaching me a lot of things...you are such a great mentor for me, and I truly be grateful for your kindness. I will never forget all the knowledge you give. God Bless you always Mr. Pysh !

[@ciarancubi]

i wish you best luck!

[@ugestacoolie5998]

good luck, how is it going now?

[@ismaelcalara4820]

i have no knowledge in investing my money. I clearly understand it now. you explained it so precise.thank you.

[@Desidude1000]

At 9.55 when you ask to make sure to comprehend and rewind a few times, you say "in order for them to compensate for all that money they would have to lose over the long haul..."; as a novice, it takes a while for me to get that what you mean is "in order for that person to pay for all the benefit he would have over the long hall...." "That person" being the new buyer.

[@michaelhofby]

I have taken 8 pages of notes so far thanks to this course lol :D And im only reached part 7

[@lisaguo5714]

thank you for the courses. you did a great job of making it very easy to understand for the students.

[@rolandocruzado]

Thanks for the videos & comments, I'm reading your book while watching your videos, they exceed what I learned in college! Some terms leave me with doubts but with the chapters, I clarify them.

[@benjamincotte2139]

Your videos are very clear and to the point. Much better content than the average stock market KZbin video. Thank you very much Preston Pysh. Greetings from France.

[@bravobryan]

I'm currently reading the Intelligent Investor for the first time. I'm really glad I found your videos. As a new investor this is very helpful. Thank you so much *****

[@AdrianButler86]

I just bought that book

[@vudufly]

First off, thanks for a very informative video. How did you calculate the bond value? We tried your Bond Price Calculator but it doesn't tally to the figures you've show on your video. Are we using the right calculator to compute the bond value? thank you.

[@chengchen987]

Thank you so much! I can't believe I am only learning this now.

[@akiko9212]

I have two questions: 1) When he ( Jesse ) decided to sell the bond within 30 years, does the charge occur for that ? 2) Does the company wants him to sell his bond on the second year, if the stock went down, the interest changed to 2.83 % like the chapter 6 What is a Bond ( 18:03) ? Your videos are very helpful and I really appreciate for all your hard work.

[@wanfenghuaian]

Hey, Preston, thank you so much for this great tutorial. Is there a formula to calculate the market value of a bond to sell?

[@premarjun2236]

first of all your lessons are very adorable for me,thank you very much. but sir i didn't understand that how you calculated the bond value as a function of INTEREST RATES and TIME REMAINING IN MATURITY . for e.g. how you calculated $871, if he wish to sell his bond after five year.i will be grateful if u answer this question.

[@RahulYadav-fx3yd]

Since the value of a bond is inversely proportional to current interest rates, the market price of a bond will increase as interest rates decrease, and vice versa. Where interest rates become a factor is when you try and sell the bond in the middle of it's term. For example, if you tried selling a 10 year 5% bond during year 5, and interest rates are 3%...your 5% bond is very valuable. Because everyone else can only get 3%.

[@CrackinDutches]

Rahul Yadav yes but how much more valueable will the bond be at 5% than 3%, how do you figure out the difference? Thats what hes asking

[@kukluxcl4n]

Kind of late of a response but here it is anyways. You have to use the formula of princing bonds, which is the price is equal to the discounted cash flows the bond is going to give.

[@Jamboreeni]

@@kukluxcl4n which is?

[@alijooya471]

Watch this: kzbin.info/www/bejne/f2ipdatqebWUptk

[@anujchauhan589]

reason why interest rates affect ur bond value...... Since the value of a bond is inversely proportional to current interest rates, the market price of a bond will increase as interest rates decrease, and vice versa. Where interest rates become a factor is when you try and sell the bond in the middle of it's term. For example, if you tried selling a 10 year 5% bond during year 5, and interest rates are 3%...your 5% bond is very valuable. Because everyone else can only get 3%.

[@sergiveramartinez2685]

So when a recession is coming and the FED starts to cut interest rates, is when I have to buy mid-term bonds?

[@jayanth1573]

Preston ur videos are brilliant...I have one doubt though....wat exactly is "interest rate" that you are referring to?

[@steevensum41]

great teacher. really easy to understand

[@katrinajeanelledelacruz5627]

Hi Preston. Your videos are very helpful to a beginner, like me. I suggest that at the end of every video, you may give like a short test to absorb information in each course. Thank you!

[@brunorodriguez8295]

2 questions sir, 1: what algorithms do you use to determine the worth of your bond certificate as the interest rate fluctuates, 2: do you do private lessons to the willing "investor" that wants to make a career out of investing? thank you very much I hope to hear from you

[@tinnguyen2219]

Thank you so much for this useful data! greatly appreciated .

[@JoshMolina]

Great work Preston!

[@sahanipuneet]

Sorry to nitpick but 6 months coupon payments would be available 1st Nov not on 1 Oct. Thanks for the great lectures, easily the best I've found so far on the internet.

[@enigmab8978]

I'm only here for that smooth saxophone intro.

[@LEON-vt8zz]

Thank you sir I really understand now.

[@martinfalk772]

So can one say that the market price for a bond usually is the par value for the bond? I saw your example in the previous video (I think) were the coupon rate was at 5% and after the crash the intrest rate was at around 2.5. Therefore the market value went up to around 1400 dollar per bond instead of 1000 dollar. So would you get 5% on 1400 dollars then or does the par value stay at 1000 dollar?

[@VisualVEN0M]

Awesome video, thank you Preston. So what happens if the company issuing the bond goes out of business before the maturity date?

[@trentonpaul6376]

If the company has any remaining money, it's paid out to bondholders before anyone else so there's a chance that you'll still get some payout. However, if the company is completely broke, then don't expect a cent.

[@MrMorshelio]

Great course man. Thanks so much!

[@degudakessa6726]

always great!! thank you

[@mayankmittal16]

Sir it would be very convenient if you let us know the calculations of this bond process it's good for better clearity in point of view from a investor and also from a co. Point of view

[@AbleAbeStudios]

Might have to watch this one again ...GO!!!

[@Spunk990]

Nicely explained

[@senorcat96]

So does this mean that if interest rates were to rise after I buy a bond, I would get back less than the par value whenever the bond becomes mature?

[@cuongngo2230]

Preston, let's say a bond has a par/face value of 1000$ with 10-year term and initial coupon/interest rate of 10% annually with semi-annual payment. 4 years after this initial issue day, the interest rate goes up to 12%/yr, so I decide to buy this bond with current bond price at $885.30 (lower bond price due to higher interest rate), then I hold it until the bond is mature (6 years waiting time). So basically, I get: ($1000-$885.30) from the gain plus passive income generated from the bond. But how do you calculate this passive income rate? Do you take 1000$ x 0.12 = $120 per year or $885.30 x 0.12 = $106.24 per year. Please let me know, thank you very much!

[@avashshrestha5573]

how did you value the bond?

[@syang029]

I got a little confuse about the term "interest rate". Based on this answer, the interest rate is really the same as coupon rate, is that correct? Thanks~

[@abelp40]

How did you get those interest rates? How do you calculate interest rates?

[@lhall3990]

excellent!

[@kassytan7797]

why the interest decrease, but the bond price increase. If in this situation, still got investor go to buy? besides, if my bond price is 1400 dollar and matured, the company still only pay me for 1000 dollar, right? thanks for your effort. :)

[@semiemregocer]

Thank you so much

[@torontomusic]

I don't understand the interest rate in this example. What is the interest rate applied to?

[@robertocanales1201]

Thank you very much! 😑🙏🏼

[@rockhaddad3271]

You are amazing

[@Seantorky3]

How do you measure margin of safety for bonds?

[@Seantorky3]

***** Thank you Preston that is very helpful. I love this series.

[@mikeclark5321]

How were the values of £871, $902 and $990 calculated? - I get the $990 as the coupon difference is $10 for the year... just not sure on the math for the other two values. Thanks!

[@Clifffffffffford]

Thanks

[@Musa-sb1sk]

Hi How did we find the $1157?

[@JesusReigns7]

So, I finally get it. "Bond Coupon Rate" is what is on the BOND EXAMPLE. "Interest Rates" is what the market offers now. Because the new buyers can buy a much higher interest bond, lets say 6% now, the "old bond" with a lesser interest rate would decline in value.

[@christhuang911]

Great stuff. Uitstekend. 很好

[@samanrasheed530]

Intrest rate in my relegion is forbidden.. so what is the alternative

[@ruchirpatil6734]

I am not understanding it, can you recommend more resources.

[@jasonkim9084]

fire

[@fundip43]

The interest rate doesnt fully account for inflation right? despite being tied to market. Inflation being say 3 percent for 30 years would reduce the value of the bond if the bond was originally bought under low inflation conditions 1% inflation purchased current/ sold inflation 3%= 2% inflation change every month compounded and the bond being paid out every 6 months (2%*6m)=12%m loss plus the 1% interest rate difference compared to the bond change % interest would result in a 13%loss in real value. How off is my math on that and how does this compare to inflation-protected government issued bonds?

[@markocvetkovic5741]

Hey wtf Jesse keeps looking the same through the years?!@? hahaha btw great teacher, thanks to you we are going to rule our Financial Institutions exam.

[@Martin-yo8wh]

At 6:52 up to 7:09, you asked why would pay less (990) when you know you're gonna get back the par value (1000) and two coupons (50; in total). I didn't quite get why wouldn't you want 1050 in exchange for 990?? I guess I am getting it wrong.

[@michaelcavanaugh9240]

At 5 years does he get 5% of the new bond value of 871 or does he still get 5% of the 1000?

[@NewxToXThisxBiz]

5 % of 1,000 since that is the value the bond was bought for; however, he was stating that in this market when the interest rate is higher than current interest rate on bond, the intristic value that you could sell your bond for is less @ 571. I don't know the exact calculation of how he was able to find this number market price number

[@davidharford3873]

How does inflation factor into this? Surely after 30 years of inflation a $1,000 bond we be worth much much less?

[@krungtv5485]

government usually match the inflation by increasing interest rate. so much likely when the price goes up or the economy is on recession the interest on both investment and debt goes up. just like previous explanation on course 6.

[@martinfalk772]

Nvm I realize the par value dont change.

[@MsNyeinchan]

If you don't sell the bond, you get the same interest rate and get the exact principle (1000) at the end of the term, right? why do you want to sell it in the first place? I don't understand. 30 years is a long time, interest rate can be up and down.

[@RookieN08]

You're absolutely right. But if you sell the bonds at really low interest rate, you can invest them into other bonds which are at high interest rate. Then, sell them at low interest rate. Repeat this process over and over again. You will earn way more money than just holding onto that one bond until it matures. But of course, it is way riskier than just holding to one bond.

[@ManishSharma-sf8re]

So i am gonna receive 60 $25 coupons that make $1500, that is all i get or i get $1500 coupon payment + $1000 par value?

[@hunterhazelwood3435]

where did you get 1157,1129,1020 where is the math.... what equation are you using.. from 5% to 4%.. how are you getting that number?

[@bennybrewer2066]

I don't understand the value change as the bond approaches maturation. The closer the bond gets to maturing, the less coupon payments there are left to collect, so it seems like the value of the bond should go down, why would someone buy a bond for more money when there's less opportunity to benefit from the coupon payments? Don't get that part at all.

[@bennybrewer2066]

Oh wait I think I get it. Because interest rates are higher in the general bond market, if a person were to buy the lower coupon rated bond, they'd actually be making less money than if they just bought a current bond, so in order to compensate for that, they pay less for the bond itself. And as the bond approaches maturation, there's less coupon payments, so comparative to the current bonds, they don't lose as much, meaning the bond value will be higher. Think I got it now but someone please tell me if my thinking is correct, thanks.

[@yan7190]

so why would anyone want to buy a bond if interest rate is low?

[@fritzki1]

how are these bond values calculated though? the concept itself is simple enough. why specifically 871 at 6% interest rate for example? and what interest rates are meant, the general interest rate on new bonds created of the same good?

[@wroomauto7615]

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[@TheAdventuresofDrewandAmanda]

so confused.....

[@sauravsamal7265]

Bhubaneswar

[@utsavkhanna9222]

But the government bonds cannot be traded , they are redeemable only on maturity and it cannot be sold to another person at a premium if the interest rates drop.

[@hunterhazelwood3435]

where did you get 1157,1129,1020 where is the math.... what equation are you using.. from 5% to 4%.. how are you getting that number?

[@rogeliovargas6359]

Hunter Hazelwood To find the present value of a bond, you need to find the present value of the par value with the current market (YTM) and time remaining on the bond. In addition, you also need to find the Annuity Present Value. Once you have these two factors, all you simply do is add them together. Ex. Original bond: Par Value= $1,000. Coupon Rate= 5%. Time lapse=30yrs In order to find the present value of the bond at 4% (YTM) with 25yrs left over (since rates changed after 5yrs). One has to find the present value first. PV= FV/(1+r)^t PV= 1000/(1+.04)^25 PV= 1000/2.66583633149 PV= $375.12 Annuity Present Value= Pmt(1-1/1+r^t)/r. Pmt= Payments. r= Rate. t= Time. An annuity is a stream of payments, in this case the stream of payments are going to be $50 because these are going to be paid annually for 30 years with the fixed coupon rate of 5%, based on the original bond. APV= 50(1-1/1+.04^25)/.04 APV= 50(1-1/2.66583633149)/.04 APY= 50(15.6220799437) APY= $781.10 APY+PV=$1,156.22 (present value of bond) You can find the present value of a bond with 15 years remaining on the bond or 1 year remaining, by using this method. Hope it helps :)

[@heshboi]

i'm not versed in maths symbols so you just confused the hell out of me.

[@ThePi3alef]

@@rogeliovargas6359 Thank you very much, Rogelio! I was looking everywhere for a complete mathematical explanation, and yours is perfect! I put the numbers for the increased Rate (from 5% to 6%) and... voilà, the mysterious 871$ has appeared!