6. What is a Bond

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In this lesson, we first learned that a bond is nothing more than a loan. There are many forms of bonds that a person can invest in, but the four primary forms are corporate bonds, Municipal Bonds, State Bonds, and Federal Bonds. We know there are inherent risks associated with purchasing a bond, but many of them can be mitigated by treating the investment as if you were a bank lender.
We learned that Bonds can be a very lucrative investment as long as you purchase the security (or bond) at a strong yield and minimal risk. If you're purchasing a bond as a long term investment, we know that it's market price will be more volatile during the first 15 years as interest rates change. Intelligent investors can take advantage of these price fluctuations is they know how to properly value the bonds.

[@davesmitte]

You have a gift for explaining complicated things in a simple to understand manner. I sincerely appreciate your matter of fact, simple explanations. A truly heart felt appreciation from me to you. Many thanks.

[@Os_-tw4ot]

***** I am doing my IMC exam and your information is so easy to understand. Amazing

[@Decade11124]

+Preston Pysh better than my professor lol

[@stupidityosh]

Lak lak thora

[@lauranyc4966]

So very true 🙏🏻👍🏻

[@awesomeblossom2417]

Great comment and very true. I'm really enjoying these videos.

[@nayyarsidharth]

For clarity on the $1418 figure: If A holds a 5% bond of $1000 face value - at the end of 30 years ( maturity period) he would make $1500 ($50 x 30) in interest bringing the total to $2500 ($1000 + $1500). Now interest rate drops to 2.83%. Mr. B is looking to invest in bonds. If B want to make $2500 at the end of 30 years (at 2.83%) he would have to invest $1418 today instead of $1000 (as Mr. A did). So Mr. A can sell his bond for anywhere between $1000 - $1418 to Mr. B.

[@chrisrabe]

I know it's been a year later and technicalities might not matter, but I did calculations based on what you said and my results didn't match $1418. I must've did something wrong. Bond A Details - 5% interest - $1000 face value - 30 years maturity period Return = $2500 30 years x ($1000 x 0.05) + $1000 = $2500 Bond B Details - 2.83% interest - ?? face value - 30 years maturity period Problem: find "face value" from the details of Bond B let f be face value 30 x (0.0283f) + f = $2500 0.849f + f = $2500 1.849f = $2500 f = $2500 / 1.849 f = $1352 Where did that extra $66 ($1418 - $1352) come from? Is that like a mark up or something?

[@mikereznikov5521]

@@chrisrabe Hey its 30 year maturity for A, but for B, which buys them 2 years later, have only 28 years to wait for maturity for its 28 * (0.0283f) + f = 2500 0.7924f + f = 2500 1.7924f = 2500 f = 2500 / 1.7924 f = 1394.77 for some reason, they calculated that for 27 years and not 28, or im missing a year somewhere

[@alanm435]

@@mikereznikov5521 he added the 2 years of getting the bond coupons

[@aldeebsaad]

Sidharth Nayyar thank you

[@ngkristal2895]

but im still so confused that why is the 5% bond worth $1418. 0.0

[@superAweber]

Wow, this is jaw dropping. No one ever came close to even showing me a tenth of this. Thank you Preston!

[@arginvestor5331]

***** Genius

[@mark91345]

After all these years, now I know what a bond is. Thank you for such a good, concise explanation!

[@mohd.sufianbinhassan5623]

cannot agree more haha

[@carsongabriel1949]

Same here 🎉😂

[@salazarselenegarcia2864]

this is exactly what I was looking for!! omg it took me years just wondering about bonds and you cleared up my doubts in 15 minutes, you do have a gift! I just watched other tutorials but all of them left me still wondering, I love this!! thank you so much!!!

[@emild3658]

Thank you very much Preston Pysh for taking the time and effort in putting together all this content. It is unparalleled on youtube, being very clear and comprehensive. I am lucky to have discovered your content now, more than 7 years after its original release. 7 years, wow.

[@mutar5]

In the history of watching youtube videos for approximately 7 years consistently. I claim this video to be the best explainotary video on the internet. I am an engineer, so I watched about 7 thousand educating videos, so I know what I am talking about.

[@CHRIS-tv7hf]

Thank you, i finally understand bond mannn, i cant find a good explanation anywhere as good and clear as you are!

[@BK-dr3px]

You explained this way better than my college textbook did. Thank you!

[@liliamvaldes473]

Absolutely amazing the way you explained bonds! It could not get better. You are certainly gifted!

[@geraldsaldanha8895]

Thank you, Preston. Those confused about how he arrived at $1418 bond value, please use excel spreadsheet to understand the valuation 1. In the first column write numbers 1-56 (pending semi-annual life term of the bond / 28 years *2 = 56) 2. In the second column, write the semi-annual coupon value i.e $25 (@5%) besides number 1-55 and besides line 56 write $1025 since you will get your initial investment of $1000 back due to bond maturity... 3. Third column, you need to calculate the present value interest factor. Since the semi-annual interest rate is .01415 (annual interest rate of.0283/2), you can calculate the present value interest factor by using the excel formula =(1+.01415)^t (here t is the corresponding time mentioned in the first column. 4. In column 4, you just need to divide column 2 by column 3 and then add the values in column 4, you should get $1417.684026

[@aliceyalenga6382]

This presentation is the best on Bonds I have watched. Its truly been well explained

[@TheViviSweety]

Thank you Preston you are amazing! Great explanation and easy to understand, although I still need to figure out how the $1418 came out but I will keep watching all the videos and they really helped me a lot. Thank you for making them!

[@chirag3179]

Amazing explanation in this video. This is first time I truly understood the concept of bond

[@MichaelOnRockyTop]

You are better than any professor Ive ever had. Im majoring in this stuff and you are a tremendous help. Thank you so much.

[@paratrip]

You are doing an extraordinary service to all of humanity. May you have a long and happy life

[@bhedge88]

You did such an excellent job explaining this concept. It was so easy to follow and the visual effects really provided so much clarity.

[@mohd.sufianbinhassan5623]

OK after so many videos I watched on bonds, I finally get a clearer picture of why investors buy bonds. (appreciation + coupon)

[@desertfox9613]

I've learned so much from your videos. You can seriously charge for this

[@sequetuquieres2048]

Finally, someone who knows how to explain the complete context of what a bond is without diving into calculations immediately.

[@rodrigodiaslima1_yt]

Preston, congratulations for the amazing job for help so many people around and thank you very much

[@laurisskraucis2247]

Amazing stuff mate, thanks for helping others out. Have a great day!

[@mroxo77]

I wish I could buy you a drink Mr. Preston, you are Gods gift, thank you ever so much for the knowledge you are passing on to us. God Bless you

[@abenezerk4984]

Thank You so very much for empowering us with knowledge. give a man a fish he will eat for a day teach a man how to eat he will eat for a life time. Very greatfull for teaching us and you are a fantastic teacher. Thank You.

[@thanasu]

To calculate bond price, you have to know about present value which is F=P(1+i)^n. Follow this one, use k = 2.83% I=$50 n=28 years. 1. Interest rate; P= I(1-(1+k)^-n)/k this formula is shorten one which derives from P=I/(1+k)^1+I/(1+k)^2+...+I/(1+k)^28 which gain 958 2. Inflation with par value, which bring par value to become devalue than 1000 P=F/(1+k)^n = 1000/(1+0.0283)^28 = 457 3.result = 958+477 = 1415

[@biggim3265]

Thank you so much. I wished this was part of the school curriculum. You really have a great way of explaining this. I came across you by chance because the UK government got into a terrible financial crisis which I wanted to understand fully. Got this in one, you are a brilliant teacher. Fantastic value ! I subscribed and hope you keep going 👍

[@jasongore4190]

Very informative. Really enjoying it so far, 6 years on :)

[@dt5487]

You are amazing. THANK YOU FOR THIS!

[@NutPae]

amazing video! was confusing about bond, but your video helped me out after all.

[@93292]

Thank you for your explanation! It makes much more sense

[@klppdc]

Great investing lessons. Keep them coming.

[@CookingDelight]

You are an amazing teacher!

[@JonnyBeoulve]

Thank you very much for this. I was confused when reading from the book and this cleared the basics up.

[@Lightbringer.528]

+Jonathan Leack what book? if you could let me know that would be great!

[@ishannarula3443]

Thank you sir ... you motivated me from day 1st .. simple and easy the best way of explaining

[@kosmonautofficial296]

amazing video thank you so much for explaining this so well

[@dinaalmonord9117]

Thank you so much for the clear explanation!

[@leadership_nugget]

thanks for this- really really helped to understand it better!

[@vincentmaldon7707]

You are the best. Glad I found you.

[@scratchy3861]

great videos these i cant stop watching.

[@rohandhawan7341]

Hi Preston! Loving your tutorials. I would appreciate if you could tell me how did you figure out the interest rates of bonds,p/e value and dividend yeild of the stocks just by looking at that graph? I was unable to calculate the same thing just by looking at the graph. Thanks :)

[@altargirl89]

We need more people in the world like preston psych! These videos are totally awesome

[@rodrigodiaslima1_yt]

It is amazing how can we find great and helpful content for free nowadays

[@ohduana6746]

Thanks you so much, Preston! I had to write a report on the debt structure of Denver International Airport and had no idea what a bond was, haha.

[@poleinthehole7404]

Preston God bless u and your family Many thanks

[@totetronico]

Very very well done video!

[@luispablo1988]

Thanks man! really clear some doubts there!

[@BlasianPersuazion]

You explained this very well! I'm going to share your channel! *two thumbs up*

[@KingJamesVL]

Preston, you are a lifesaver. Investing has always been a confusing topic for me but with your help, I am finally understanding. Please keep up the great work? How can I show some support to your page?

[@MichaelOnRockyTop]

Go away you spamming troll

[@marcosrafael7929]

Thank you Preston, you are very clear and I finally got the idea of that term.

[@bmanq2234]

Amazing video! Thank you!

[@mazenalsharekh3125]

That was brilliant man!!

[@derrickhoe9886]

Thanks so much for the information, really what i need to get started!!! Thanks for giving!!!

[@aakashsachdev5129]

Great explanation - your video the whole concept of bonds into perspective; from corporations to governments. Cheers

[@naranjoraymond6266]

thank you for sharing all of us this sir,god bless

[@anilt3275]

Hi Preston, Thank you so much for sharing valuable information. I am gonna watch all the series of these videos. I think there are some lessons missing like 3, 7 etc. Could you please provide me the link of these missing lessons. God bless you :)

[@kintin7264]

thanks this is awesome explanation can you also introduce what is yield vs bond ?

[@kiyaheza7485]

Great Channel to build your financial education!!

[@gauravkandal]

Hey preston thanks for such lovely information !! Please tell me how u calculated value of the bond from $1000 to $1,418 ?

[@mensanmichelkinvi4304]

Mr Preston, Thanks fot your good job. I have a question. As the bank hasn't yet sold the bonds but was willing to facilitate the loan, from what source does the bank collect the Money to facilitate the loan?

[@elvisdun8588]

Wow!!!! This is amazing...

[@alexandermyrie7934]

Excellent video. Very insightful and good use of examples and analogies. What's the name of the instrumental at the start and at the end?

[@youtubechannel-bb5ni]

Jack is the kind of guy you just wanna kick back and chill with

[@sidmoitra007]

Thanks a lot for making these vids. I invest in Indian mkts and now I believe to use these rules... :)

[@rubenscpersonal]

First of all thanks for the amazing videos. Now one question. in 2017 we have overvalued stocks and low interest bonds. What is the value investing approach in this scenario?

[@KJsiriusK]

Thanks for the great information.

[@konstruktivnikritikaodkons1496]

Really nice explenation ! Thanks

[@moflyboyblanquito541]

This is great thanks for sharing

[@flypimpinogflypimp2126]

You do a very good job explaining things and putting a slideshow up as you explaining i best learn through example so this is perfect very good video. New subscriber here I just came across your channel

[@khsimagesdotcom856]

Thank you for this masterful explanation! What do I do now when interest rates are very low and stock prices are high? Do I buy bonds in case interest rates go negative, search for undervalued stocks, switch to an entirely different asset class or wait for a more favorable investing environment? If the answer is to wait, then what form should my capital take?

[@stephenmancuso3314]

SOOOO HELPFUL THANK YOU!

[@Rafa0Blues]

Hi Preston, great channel man thanks for the great videos. I have a question: why the goverment drop the interest rate of the bonds when they try to stimulate the economy? Thanks man

[@AbleAbeStudios]

Great lesson, I think I'm getting it ...GO!!!

[@jubatimes424]

I find this video very easy to understand

[@matthewplehn4271]

It seems to me the most important lesson is to always be on the right side of the equation..as you say, when the yield of the market is less than the yield of bonds thats when you want to be in bonds. Currently the market is yielding more than bonds so to be in bonds right now doesnt make sense. Or maybe especially right now given the uncertainty of QE

[@tiotigeorge4794]

Informative video...keep it up

[@cmt6]

Thanks for the great wealth of information..Even your books are also good. Highly recommended cheers.

[@truckersagainsttrafficking7550]

What a superb job! I watched a few other videos and was so clueless still. Many do you have more??

[@dancorolevschi5244]

u explain amazing thx a lot

[@davidharford3873]

So it is basically like a term investment (except you can sell the bond at any time??) with the bank. But the bond is held with a business/government and not directly the bank.

[@Ksp8197]

Hey Preston, Im an ardent watcher of your incredible videos. I wanted to get some clarification on something you said about risk associated with bonds. point 2 states that interest rates change, however you only list the positive of it i.e. if you buy bond at 5% interest and a year later its 4%, you are still at an advantage - would the risk then be if you buy bond at 5% interest and then a year later its at 6%- so you'd be at a disadvantage? Thats my guess and what would seem logical, but would be super grateful if you can clarify. Once again, your videos have been such a pleasure watching!

[@AdrianButler86]

@Jing Li disadvantaged if ur plan was to sell it alomg the way and get out of it and just be happy u got some interest and now wanna free up ur money again. You still are winning if u hold it till maturity becuase u still gettin ur 5% all the way till it matures n u given ur $1000 back. Lemme kmow if this is all correct as i am just learning all this stuff. Thanks

[@The-Hidden-Gems]

Very nice video!

[@hunterhazelwood3435]

this is a super awsome vid, your doing great. unfortunately i dont undersand the last part on bond value ughhh.

[@richardnavaltv2794]

sir we have a bond from my grandfather,, we do not know how to use this, and where to exchange.. can u give me info. or answer? thank u.

[@anthonymchiles]

Question: when Jacks company makes the coupon payments, is he making the payment of 5% on the full 500,000 bonds? I was confused on that.

[@aguzman11189]

This is awesome! :)

[@kalyanbiswal7771]

Preston you are a genius love from India

[@cosmicbandido8186]

@Preston when I buy a 10 year bond at a given date and interest rate is 2% at that point. Do I get the whole 10years that 2 % ( is it fix ) or does it change when interest rate change?

[@Chris-fc6op]

Great vid. Thanks.

[@dicklawsondotcom]

That was a very quick response, thanks for that, understand your comments. What I dont understand however is how did you calculates that the bond 5% coupon bond was worth $1418 when the current federal rate was 2.83% ? PS - Your book is great, hope it does fantastically well ...

[@langa1533]

Remember watching these videos in 2015

[@tomltomm2866]

WOOOHOOO I GRADUATED UNIT 1!!!!!!!!!!!!!! ON TO UNIT 2 :) thank you sir Preston

[@pantasticodeniro9874]

Thanks for the video! But I'm very confused with 17:55. How did you arrive to those numbers? Thanks! :)

[@maxbottaro1]

in the risks of bonds, you didn't discuss liquidity. My guess is you can sell a bond at any time, but what happens it you sell it or need to liquidate it before it matures? you just get whatever it is trading at?

[@matiasiozzia9547]

Hey, Preston, I would like to congratulate you and Sting on your channel. Regards from an Argentine, living in New Zealand.

[@iQuantom]

Great video

[@stephenhart494]

looking for clarification here. You said as bond prices go up typically stock prices go down and vice versa. but as the stock prices go up the bond yields go up, correct?

[@tafoda321]

you rock man! Thanks!

[@samwheller]

Thank you Sir.

[@missLinett]

Hello Preston, I'm studying macro atm and I'm just a bit curious about bonds. If I eg. purchase a bond before the interest rate goes down, the value of the bond increase. Does it affect my bond as well if choose to keep it? Or only for people that actually sell their bonds to the market (for a higher value)?

[@maxbottaro1]

1 more question- how are you getting to the $1418 value at the end of the video, is that just an arbitrary market price based on what people are willing to buy it for, or is it specifically based on the yield % (e.g. 5% is 43% higher than 2.83, therfore the par value is approx 43% higher @ $1,430 than the $1,000 par priceyou pad before?)