1
A bond is a loan with fixed terms.
face value
repaid at the end
also called par
coupon rate
the interest, per year
applied to the FACE value
maturity
when the face value comes back
5, 10, 20 years
You lend the issuer the face value, collect coupons along the way, and get the face
value back at maturity. A shareholder, by contrast, owns a slice of the company and is
promised nothing.
2
Coupons are the same every time.
yearly coupon = 40000 × 0.07 = ₱2,800
on the face value
over 8 years: 8 × 2,800
nothing compounds
= ₱22,400 in coupons
plus ₱40,000 back at maturity
The coupon never changes with the market price. That fixedness is the point of a
bond, and it is why bonds are called fixed-income securities.
3
The price moves even though the coupon does not.
at par
price = face value
coupon matches market rates
at a premium
price above face
its coupon beats current rates
at a discount
price below face
its coupon lags current rates
Price and market rates move in opposite directions
If new bonds start paying 8%, nobody will pay full price for an old 5% bond, so its
price falls until the return matches. Rates up, prices down. It feels backwards
until you realise the coupon is frozen and only the price can adjust.
4
Current yield divides the coupon by the price paid.
coupon = 20000 × 0.06 = ₱1,200
from the FACE value
yield = 120024000
over the PRICE paid
= 0.05, so 5%
less than the 6% coupon
Same rule as a share's dividend yield: the rate belongs to the security, the yield
belongs to your purchase. Buying at a premium pulls the yield below the coupon; buying at a discount lifts it above.
5
Variations: quarterly coupons, the price for a target yield, a bond with no coupon.
Quarterly coupons: a ₱25,000 bond pays 8%, quarterly.
yearly coupon = 25000 × 0.08 = ₱2,000
the rate is per year
each payment = 2,000 ÷ 4 = ₱500
four payments a year
Dividing the rate by 4 first gives the same ₱500: 25,000 × 0.02. Using 8% per quarter would give ₱2,000 each, four times too much.
The price for a target yield: a ₱15,000 bond pays 4%. What price gives a 5% current yield?
coupon = 15000 × 0.04 = ₱600
fixed by the face value
600price = 0.05
yield = coupon ÷ price
price = 600 ÷ 0.05 = ₱12,000
a discount
A yield above the coupon rate needs a price below face value — the "rates up, prices down" rule in numbers.
A bond with no coupon: bought at ₱8,000, it repays ₱10,000 in 4 years.
coupons: none
the coupon rate is 0
earned = 10,000 − 8,000 = ₱2,000
all of it at maturity
A zero-coupon bond is always sold at a discount, because the gap between price and face value is the only return it pays.
6
Bonds and stocks answer different questions.
bondholder
a lender
fixed coupons, face value returned
shareholder
an owner
dividends only if declared
if the company fails
bondholders are paid first
shareholders last, often nothing
₱250 per payment on the opening problem
Lower risk, lower ceiling. A bond will not make you rich if the company thrives —
the coupon is fixed whatever happens — but it pays before the owners do if things
go badly. That trade is the entire reason both exist.
On the exam
Periodical exams ask for a coupon payment, the coupons over the life of a bond, the current yield, or the meaning of premium and discount; entrance tests like "rates rise, so prices…" and the semi-annual split. Take the coupon from the face value, divide by the number of payments a year, and divide by the price for a yield. For a 10-second check, a bond bought at a discount must yield more than its coupon rate.
Remember the flow
Coupon from the FACE value · Divide by payments per year · Yield over the PRICE paid · Rates up, prices down
The coupon rate is always quoted per year, however often it is paid.
