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BONDS. When governments and companies want to raise money, they often issue (sell) bonds to the public As an investor, when you purchase a bond, you are really just loaning the organization money. Because the organization is borrowing money from the investor we call it a debt instrument.
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BONDS • When governments and companies want to raise money, they often issue (sell) bonds to the public • As an investor, when you purchase a bond, you are really just loaning the organization money. • Because the organization is borrowing money from the investor we call it a debt instrument
Bonds • In return for the loan, the organization will agree to pay you an annual interest rate and pay back your principal at an agreed future date (the maturity date). • Maturity dates can be 3, to 10 or even 30 years away.
4 main components of a Bond • Principle – original amount you invest • Interest rate • Risk factor – chance of getting your money back • Time – how long is your money invested
How to Calculate Bond Interest • I = p * r * t • P = price • R = interest rate • T = time
Example 1 • CIBC issues $1000 bonds with a 8% annual interest rate. The bonds maturity date is in 10 years time. As an investor, you decide to buy one of the bonds a. What is the principal b. How much interest do you receive every six months c. How much interest will you receive? When is your principle paid back to you? a. 1000 b. 1000*.08 * .5= 40 c. 1000*.08*10 = 800
