5.5 Bonds

Instruments and Platforms

Let us look at Bonds

  1. Debt Instruments – Issued by government, corporations and other entities in order to finance projects or activities.

  2. Face value – It is basically the loan that is given by the finance corporation. That would determine the amount of face value of the bond.

  3. Interest - Once the amount is loaned to the finance corporation or the government, the investors receive the interest for the money that he lent to the particular entity. The interest of the bond is also known as a coupon

  4. Maturity Date – It is when the bond expires and the investor receives his capital back.

Let us look at a case study of the bond instrument.

In the case study here, for example:

  1. Face Value of the Bond - $1000

  2. Coupon Rate / Interest Rate – 10%

  3. Maturity Date – 10 years.

If the investor has bought the bond or has given $1000 to the corporation or government, let us calculate the interest the investor will receive.

  • Investor who buys the bond will receive $100 (10%) interest per year for 10 years = $1000 for 10 years.

  • At the end of the maturity date of 10 years, investor will get his capital back, which is $1000 + $1000 (Total Interest calculated above) = $2000

Bonds are naturally known to be safe. However, you should understand that the more the interest rates, the higher the risks of the bond. As a trader, we should always cover our risk by predefining our downside. The upside will always look after itself. More on the Risk management will be covered in the later modules.

This case study will give you a good understanding of the different terminologies that we use and how it applies to a bond example.

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