When a company (or government) borrows money
from the public or banks (bondholders) and agrees
to pay it back later
The amount of money that the company borrows.
Usually it is $1,000.
This is like interest. The company makes
regular payments to the bondholders, like every 6
months or every year.
The legal stuff. A written agreement between
the company and the bond holder. They talk about
how much the coupon payments will be, and when
the money (par value) will be paid back to the
Date when the company pays the par value back
to the bondholder.
Market Interest Rate
This changes everyday.
The thing about bonds is that the interest rate
(coupon payments) is fixed. It doesn't change. And bonds
last a long time. Like 10 years or whatever. So in the
meantime, the market interest rate (the interest rates in
general) go up and down. OK, well, if the coupon payments
are for 10% and then the market interest rates fall from
10% to 8%, then that bond at 10% is valuable, right. It
is paying 10% while the overall interest rate is only 8%.
Exactly how much is it worth? You mean 'what is the
present value of a bond?'
The Present Value of a Bond
The Present Value of the Coupon Payments (an annuity)
Author: Mark McCracken is a corporate trainer and author living in Higashi Osaka, Japan. He is the author of thousands of online articles as well as the Business English textbook, "25 Business Skills in English".