So let's say for this type of risk, you would now expect a 15% interest rate. Let's say that interest, interest rates go up, and let's say they go up in such a way that now that they've moved up for this type of a company, for this type of risk, you could go out in the If interest rates go up, let me do this in a new color. Obviously, interest ratesĭon't move this quickly, but let's say the momentĪfter you buy that bond, or maybe to be a littleīit more realistic, let's say the very next day, interest rates go up. Now, let's say that the momentĪfter you buy that bond, just to make things a little bit. 10% is a good interest rateįor that level of risk. Getting roughly 10% a year, and then I get my money back. Or on day zero, if you will, you'll be willing to pay $1,000 for it because you say, look, I'm So the price of the bond, the price of that bond right when it gets issued So a 10% coupon is just about perfect, so you say, you know what? I think I will pay $1,000 for it. You say, you know what? For a company like company A, for this risk profile, given where interest rates are right now, I think a 10% coupon That we're talking about the bond is issued, and you look at that and Now, the day that this, let's say this is today Par value of our bond, and we'll also get $1,000. Years, we'll get $50, and we'll also get the Half of our 10% coupon every six months, so we're going to get $50 here, $50 here, these are going to be our coupon payments, $50 there, and then finally, at two 10% of $1,000 is $100, so they're going to give The par value per year, but it's going to break it up We went over a little bit of this in the introduction to bond video, but it's a 10% coupon paid semi-annually, so it will pay us 10% of Halfway is 12 months, then this is 18 months, and this right here is six months. This is two years in theįuture when the bond matures, so that is 24 months in the future. Let me draw a little timeline right here. If we just draw the diagram for this, obviously I ran out of space on the actual bond certificate, but let's draw a diagram of Let's say it has a two-year maturity, and let's say that it has a 10% coupon, 10% coupon paid semi-annually, so this is semi-annual payments.

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It could be from a municipality or it could be from the U.S. It doesn't just have to be from a company. Let's start with a bond from some company. With a fairly simple bond, one that does pay a coupon, and we'll just talk a little bit about what you'd be willing to pay for that bond if interest rates moved up or down. Voiceover: What I want to do in this video is to give a not-too-math-y explanation of why bond prices move in the opposite directionĪs interest rates, so bond prices versus interest rates.

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