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Principles of Finance Videos 166 videos

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Principles of Finance: Unit 5, Deconstructing a Bond: Hello? 6 Views


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Description:

In this video, we'll deconstruct a bond, dissecting it for all its parts - we'll get into principal, par value, spread, and all sorts of other goodies.

Language:
English Language

Transcript

00:00

Principles of finance Ah la shmoop deconstructing a bond Hello

00:08

You know that song Hello By adele You know you've

00:11

heard it like eight thousand times Hello How are you

00:15

Yeah So think of the you today Wondering whether you

00:18

should loan money to the you of ten years ago

00:22

Hello with you How much And on what terms What

00:25

details would you have wanted to go lean before you

00:29

wrote the check for your hard earned money to risk

00:32

being fully lost on the flaky you of ten years

00:36

ago Okay So dialing it back here The key vocab

00:39

words You must know the key components to a bond

00:42

The principle it's The base amount of a bond loan

00:45

The dollar amount that is loaned before interest and fees

00:48

or commissions or taxes or anything else In the world

00:51

of corporate bonds and most government bonds The base amount

00:55

is usually in multiples of a thousand bucks and for

00:57

larger accounts It's five thousand bucks and these air called

01:00

bond denominations of thousand dollars Five thousand dollars Ten thousand

01:04

a hundred thousand All denominations you know like denomination for

01:08

best bond in a short film category goes to the

01:11

t bill the principal in a mortgage style bond is

01:15

the amount the bank is loaning us You can buy

01:18

your three bedroom picket fence quarter acre house with you

01:21

know basement dungeon dream home you know fifty shades of

01:24

home if you put one hundred grand down and borrowed

01:26

four hundred thousand dollars is your mortgage from the bank

01:28

to pay five hundred thousand dollars for the dream home

01:31

of your life Your loan principal is yes for hundred

01:34

thousand dollars Well in most bond scenarios the principle can

01:38

be and is bought and sold just like any other

01:41

security So in the case of the you loaning money

01:45

teo you let's say the older you realize is that

01:49

you take too much risk in life You followed your

01:51

dreams try to become a rock star rather than listening

01:54

to your nightmares age forty homeless and broke that's how

01:57

you ended up trying to sing So the older you

02:00

cells that bond to someone else who doesn't mind your

02:04

maniacal focus on head banging metal band practice or at

02:07

least unlike the older you doesn't view that as a

02:10

fundamental risk in them paying back the money they borrowed

02:13

Well bonjour typically issued in these thousand dollars based units

02:17

or their par value or face value But they're quoted

02:21

in units of one hundred you know go figure that

02:23

is a bond units selling for one thousand twenty five

02:26

dollars would be quoted as one oh two and a

02:28

half And when you buy the bond you pay one

02:31

hundred three cents on the dollar The cellar of a

02:34

bond gets one Oh two and a half cents on

02:36

the dollar in the fifty cents goes to the agent

02:39

there Got it And i get really technical Bonds are

02:41

usually quoted as a spread like this like a play

02:44

bond issue Here's mr november that is one oh two

02:48

and a half by one of three Which means that

02:50

if you're the buyer of the bond you pay one

02:52

hundred three cents on the dollar And if you're the

02:54

seller of the bond you get one hundred two and

02:57

a half cents on the dollar That's spread which pays

02:59

the person making the market in the bonds or the

03:01

broker is one Oh three Oh minus one o two

03:05

Five equals Yep five bucks So when you do buy

03:08

a bond you'll buy it in one of two ways

03:11

Well in the olden days there were a lot of

03:13

bearer bonds meaning the bearer or the person who had

03:17

the bond in their possession like in their wallet owned

03:20

it's like a built like a paper bill Basically back

03:23

then you could carry around bonds just like they were

03:25

cash and there was no trail in the same way

03:28

There's really no trail on a twenty dollar bill you

03:30

just downloaded from aversa teller atm nonunion robot But because

03:34

barry bonds are really not the best thing to be

03:37

carrying around full that in your wallet the trend quickly

03:40

became to issue new bonds as registered mainly so that

03:44

they could be held elektronik lee and save the murder

03:47

of millions of trees and or sheep Today most bonds

03:50

don't even carry a paper attributes Rather the buyer gets

03:53

an email more or less with a bond registration number

03:56

and those bonds are usually held inside of the buyers

03:59

mutual fund or hedge fund Or if it's a consumer

04:01

buying the bond that number just shows up in their

04:04

fidelity schwab betrayed or other online brokerage account So today

04:08

Bonds don't get a certificate there issued in book entry

04:12

form Will the transfer agents just keep elektronik records of

04:15

the bonds and their little scriven er's ledgers The names

04:18

and addresses and data of the buyer and seller are

04:20

copiously stored But there's no subsequent paper paperwork that goes

04:24

along with it And all of this is really cool

04:26

to now be elektronik But back in the day bonds

04:29

were actually printed in some of the artwork was actually

04:32

pretty cool Note that it's par value is ten thousand

04:36

bucks and it has really pretty borders Ok next big

04:40

element of a bond is the nominal rate Nominal It

04:44

means in name So on the face of the bond

04:47

certificate there will be a named interest rates Take a

04:50

look at this bond right here Jonathan do well here's

04:53

the nominal or face amount And it says four percent

04:57

So this piece paper backed by the company solar city

05:00

now owned by tesla's pays four percent interest Let's pretend

05:03

the bonds a thousand dollar unit Well that means the

05:06

registered owner of this bond is due to be paid

05:09

twenty bucks twice a year or forty dollars a year

05:11

As interest payment on that thousand dollars they're renting So

05:15

the quick summary you buy a bond for twenty five

05:17

thousand dollars that pays eight percent a year and see

05:20

how we're changing this up on you to make life

05:22

difficult The principal's twenty five grand thie interest payment is

05:25

two grand a year or a thousand dollars every six

05:27

months because that's how bond's role they pay interest twice

05:30

a year the nominal rate of the bond maybe eight

05:32

percent But if you had to pay a premium of

05:34

say thirty grand instead of twenty five grand for that

05:37

quote eight percent paper unquote well then you won't actually

05:41

be getting an eight percent return on the thirty grand

05:43

you invested you'll still get the two grand a year

05:46

which is to over thirty or about a six point

05:48

seven percent return If you really want to feel connected

05:51

with dead bad grandpa well you can try to find

05:53

barry bonds which are like old ten thousand dollar bills

05:57

but you'll have a whole lot more love finding a

05:59

wide selection of bonds in the registered aisle of the

06:01

bond grocery store It's schwab's good stuff get the sauce

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