Bond In A Nutshell (How It Works)
Did you know that the actors who have turned down the role James Bond includes Hugh Jackman, Cary Grant, Liam Neeson, Clint Eastwood, and Burt Reynolds? Eastwood and Reynolds did so because they believed Bond had to be British (source: www.nme.com). Surprised? Well, let’s get to know more about bonds, only this time, it’s going to be the one used in the world of finance ~
A bond is a kind of investment in which a company or government (the issue) borrows money from an investor (the bondholder). Complicated?
Simply put, bonds are basically loans represented by fixed income documents, commonly used in financing projects or operations. In the Philippines, banks issue bonds which can be purchased by private individuals, just like you and I. Purchasing bonds is less risky and more predictive than possibly most of the other forms of investment. If this is your first time to read about bonds, please indulge.
If you will invest in bonds, the bond issuer will pay you according to conditions that are set by the issuer itself: how much the interest rate is (the coupon rate); and whether it is monthly, quarterly, or yearly. In this kind of investment, the bond issuer will pay the interest initially according to the set condition (the coupon payment), and at the last term of payment (the maturity date), the borrower will pay the amount of money borrowed (the principal) from the bondholder.
Example
Let James be the bond issuer and Baldo will stand as the bondholder. James will issue a ten-year bond with the principal amount of 1,000,000 pesos with a coupon rate of 5% that will be paid yearly. To get the coupon payment, 1,000,000 pesos will be, multiplied to .05 resulting to 50,000 pesos.
| Payment | Coupon Payment | Principal Payment |
| 1st year | 50,000 | |
| 2nd year | 50,000 | |
| 3rd year | 50,000 | |
| 4th year | 50,000 | |
| 5th year | 50,000 | |
| 6th year | 50,000 | |
| 7th year | 50,000 | |
| 8th year | 50,000 | |
| 9th year | 50,000 | |
| 10th year | 50,000 | 1,000,000 |
In this case, James will pay Baldo 50,000 pesos yearly, and at the last term, 50,000 pesos plus the principal amount of 1,000,000 pesos will be paid to Baldo.
For a bond issuer, a bond will be a source of capital to sustain operations or finance new projects. While for the bond holder, bond will serve as a profit even if he/she is not working or not doing business.
Take those baby steps and start investing, should you need to start by applying for a loan product, just click here.
Global Dominion Financing Inc. (GDFI) is the Philippines’ number 1 lending company offering OFW Cash Loan, Doctors Personal Loan, Car Collateral Loan (Sangla ORCR), Car Financing, Car Loan Takeout, Medical Equipment Financing, and Truck Financing.
