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BondsA bond is really the same thing as a loan. When a company, or a government entity, sell bonds they are borrowing money. The face amount of the bond (maturity value) is the amount paid at the end of the bond term. You can think of this as the principal amount of a loan. The coupon rate (interest rate, stated rate, face rate) is the amount of interest the bond periodically pays and it is based on the face amount of the bond. Typically, bonds pay the coupon amount annually and the face amount at the end of the bond term. There are exceptions that will be discussed later.For example, a bond with a $100,000 face value and an 8% coupon rate will pay $8,000 annually. If the bond term is 20 years, the $8,000 is paid each year for twenty years and the $100,000 is paid at the end of the twentieth year. Since bonds normally have long bond terms (20 or 30 years is not unusual) there will be increases and decreases in the current market interest rate during the bond life. However, the bond has been issued and the coupon rate on the face of the bond cannot be changed, See Kirch’s 3rd Law of the Universe. That means if the bond is sold before maturity it needs to be revalued to determine its worth in relation to the current interest rate.Let’s use the $100,000 of 8% coupon rate bonds as the example. The $8,000 annual coupon payment and the $100,000 maturity value are payments to be made in the future. If the bonds are to be sold with ten years left before maturity we can calculate the present value (today’s value) of the bonds using the current interest rate. Assume a 10% current rate.So,8,000 PMT100,000 FV10 N10 I/YCPT PV = 87,710.87In other words, if you paid $87,710.87 for the bonds you would earn 10% on your money by the time you received the remaining 10 payments of $8,000 and the last payment of $100,000 ten years from now.Bonds issued for less than the face are said to be issued at a discount. ................
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