The start of Bonds 101

This is going to be a tight rope act.  Please wiggle the line if I start getting too fancy with my footwork, but this is what I do... well we will start with what is a bond?  Everyone, individuals, companies, the government, ect. ect., have a balance sheet.  Assets on the left and Liabilities to the right.  I certainly consider Christian Louboutin shoes a major asset!  The average Americans largest asset is their home property, therefore making their biggest liability their mortgage payment.  Liabilities are just I.O.U.s.  That five bucks that Eric wants back, liability.  The fact he promise to pay for dinner tomorrow, that would be an asset under Accounts Payable.

On a company balance sheet bonds are their I.O.U.s to the bondholders.  You'll notice that I have painted liabilities red, which is more than just pretty colors.  If you've ever heard the term, "Back in Black" (Not via ACDC), typically means you went from (negative) cash flow to positive! 

When an entity (typically business or government) needs cash cash money they could just charge it on their credit cards, but lets say they need millions of Benjamins?  They can issue a bond, oh yeah.  One bond is 1,000 smackaroos.  The investor says hey Mr. Entity, here is my $1,000, but what are you going to give in return for this money?  Because, after all, there is no free lunch. 

The entity is like, weellllll I want to borrow this $1,000 for 10 years and I will return it to you, and in exchange I will give you 5.00% interest semi-annually on your $1,000.  Every 6 months for 10 years you receive a coupon of $25 ($50 per year is 5.00% on $1,000).  Then at maturity date, thats like the expiration date the entity pays you one last interest payment and your principal back (the $1,000). 

Neat little tid bits if you are a nerd.  The reason the interest is called coupon payments is because waaayyyyyy back in the day if you bought a bond there would be the certificate and perforated coupons on the bottom.  When it was time for another coupon payment you would rip off your coupon and cash that sucker at the bank.  These were called bearer bonds, as they bore the actual coupons. 

Yep, I'm a nerd. Any questions??