Macroeconomics

‭from‬‭stocks‬‭is‬‭to‬‭sell‬‭them‬‭to‬‭someone‬‭else‬‭when‬‭their‬‭value‬‭increases‬‭(i.e.,‬‭appreciates).‬‭The‬‭value‬‭of‬‭a‬ ‭stock is mainly derived from the dividends they pay as well as their ability to appreciate.‬ ‭A‬ ‭bond‬ ‭can‬‭be‬‭issued‬‭by‬ ‭a‬‭company‬‭or‬‭a‬‭government‬ ‭.‬‭Unlike‬‭stocks,‬ ‭bonds‬‭do‬‭not‬‭give‬‭their‬‭holders‬ ‭ownership‬ ‭claims‬ ‭.‬ ‭They‬ ‭only‬ ‭represent‬ ‭a‬ ‭loan‬ ‭that‬ ‭is‬ ‭paid‬ ‭for‬ ‭today‬ ‭in‬ ‭exchange‬ ‭for‬ ‭money‬‭in‬‭the‬ ‭future‬ ‭.‬ ‭They‬ ‭pay‬ ‭interest‬ ‭to‬ ‭their‬ ‭holders;‬ ‭therefore,‬ ‭to‬ ‭bondholders,‬ ‭bonds‬ ‭are‬ ‭an‬ ‭asset‬ ‭not‬ ‭a‬ ‭loan‬ ‭(liability) because they are effectively lending money to their issuers who will repay them in the future.‬ ‭●‬ ‭The‬ ‭Bond’s‬ ‭Maturity:‬ ‭The‬ ‭length‬ ‭of‬ ‭time‬ ‭until‬ ‭a‬ ‭bondholder‬ ‭is‬ ‭paid‬ ‭a‬ ‭fxed‬ ‭amount‬‭of‬‭money‬ ‭known as the par value (i.e., until a bond matures).‬ ‭●‬ ‭The‬‭Bond’s‬‭Par‬‭Value‬‭(also‬‭known‬‭as‬‭face‬‭value):‬ ‭In‬‭simple‬‭terms,‬‭it‬‭is‬‭the‬‭bond's‬‭original‬‭price‬ ‭or‬ ‭the‬ ‭amount‬ ‭the‬ ‭issuer‬ ‭promises‬ ‭to‬ ‭pay‬ ‭back‬ ‭to‬ ‭the‬ ‭bondholder‬ ‭when‬ ‭the‬‭bond‬‭reaches‬‭its‬ ‭maturity‬‭date.‬‭This‬‭value‬‭is‬‭typically‬‭$1,000‬‭for‬‭many‬‭bonds.‬ ‭So,‬‭if‬‭individual‬‭B‬‭buys‬‭a‬‭bond‬‭with‬ ‭a‬ ‭par‬ ‭value‬ ‭of‬ ‭$1,000,‬ ‭the‬ ‭issuer‬ ‭will‬ ‭repay‬ ‭individual‬ ‭B‬ ‭that‬ ‭amount‬ ‭when‬ ‭the‬‭bond‬‭matures,‬ ‭regardless of what individual B paid for it.‬ ‭●‬ ‭The‬‭Bond’s‬‭Coupon‬‭Payments:‬ ‭The‬‭interest‬‭that‬‭the‬‭bondholder‬‭receives‬‭for‬‭lending‬‭money‬‭to‬ ‭the‬ ‭issuer.‬ ‭When‬ ‭a‬ ‭person‬ ‭buys‬ ‭a‬ ‭bond,‬ ‭the‬ ‭issuer‬ ‭agrees‬ ‭to‬ ‭pay‬ ‭the‬ ‭buyer‬ ‭periodic‬ ‭interest‬ ‭payments‬‭(the‬‭coupon)‬‭for‬‭a‬‭set‬‭number‬‭of‬‭years‬‭until‬‭the‬‭bond‬‭matures.‬‭This‬‭interest‬‭payment‬ ‭is‬‭a‬‭fxed‬‭percentage‬‭of‬‭the‬‭bond's‬‭par‬‭value.‬ ‭For‬‭example,‬‭if‬‭individual‬‭C‬‭has‬‭a‬‭$1,000‬‭bond‬‭with‬ ‭a‬ ‭5%‬ ‭coupon‬ ‭rate,‬ ‭individual‬ ‭C‬ ‭will‬ ‭receive‬ ‭$50‬ ‭in‬ ‭interest‬ ‭each‬ ‭year‬ ‭(5%‬ ‭of‬ ‭$1,000).‬ ‭These‬ ‭regular‬ ‭interest‬ ‭payments‬ ‭are‬ ‭individual‬ ‭C’s‬ ‭reward‬ ‭for‬‭holding‬‭the‬‭bond,‬‭and‬‭they‬‭are‬‭typically‬ ‭paid semi-annually or annually.‬ ‭Bonds have three key features:‬

‭Example of how bonds work:‬ ‭GreaTech‬‭Inc.‬‭is‬‭a‬‭technology‬‭company‬‭looking‬‭to‬‭expand‬‭its‬‭operations‬‭to‬‭produce‬‭a‬‭new‬‭groundbreaking‬ ‭gadget.‬ ‭Instead‬ ‭of‬ ‭seeking‬ ‭a‬ ‭bank‬ ‭loan,‬ ‭they‬ ‭opt‬‭to‬‭issue‬‭300‬‭bonds‬‭with‬‭a‬‭face‬‭value‬‭of‬‭$1,500‬‭each.‬ ‭These bonds offer an annual coupon payment of 4% and mature in 4 years.‬

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