Good for a golf score; bad for a bond.
Bonds are issued with a face or coupon rate of, say, 6% and sold for units of $1,000, or 100 cents on the dollar. But if prevailing interest rates go up, or this bond's creditworthiness stumbles, then its interest rate will go up. Not by dint of the coupon rate changing, but because the price of a bond unit will fall below 100 cents on the dollar, aka 'par,' so that for the same stream of 60 bucks a year, instead of paying a grand, a buyer of that bond can pay, say, 900 bucks for that 60 a year.
The yield to the buyer is then 60 over 900, with a little kicker each year as the bond comes closer to maturity at a grand and, in theory, appreciates a little bit.
We'll let you do the math.
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Finance: What are Bonds?393 Views
Finance a la shmoop what is a bond? well a bond is your word your promise your [Women shake hands]
handshake your John Hancock on a contracted piece of paper your mortgage
your credit card debt yeah their bonds to your "I swear I'm not a deadbeat"
declaration... that's your bond right well bonds come [Man lying on a sofa]
in many complex flavors and compositions simply put bonds are loans aka debt you
borrow money or you promise or you you bond that
you'll pay it back when you borrow money the amount you borrow is called the
principal you pay rent on that amount borrowed and that rent is called [rent appears at bank]
interest to the entity loaning you the money that interest is called yield
thank you very much for the yield like if the lender rents you a grand for a
year and you pay them a thousand 80 bucks at year-end paying back the
principal and then the rent on the money while the lender will have had a yield [Yield of lender appears]
of 8% on the grand that they loaned you so that's a bond you borrow money you
pay it back and if you don't the person who loaned you the dough well they [Person stamped with property of shmoop bank]
generally own your tuchus and yeah you know what Shakespeare said about bonds
yeah that's what he said so if you don't really know what you're doing don't do
it...
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Maturity is, quite simply, the date when a debt becomes due. As for our maturity, well... we're still giggling about the word "due."