# 15.2 How households supply financial capital  (Page 4/43)

 Page 4 / 43

In financial terms, a bond has several parts. A bond is basically an “I owe you” note that is given to an investor in exchange for capital (money). The bond has a face value    . This is the amount the borrower agrees to pay the investor at maturity. The bond has a coupon rate    or interest rate, which is usually semi-annual, but can be paid at different times throughout the year. (Bonds used to be paper documents with coupons that were clipped and turned in to the bank to receive interest.) The bond has a maturity date    when the borrower will pay back its face value as well as its last interest payment. Combining the bond’s face value, interest rate, and maturity date, and market interest rates, allows a buyer to compute a bond’s present value    , which is the most that a buyer would be willing to pay for a given bond. This may or may not be the same as the face value.

The bond yield    measures the rate of return a bond is expected to pay over time. Bonds are bought not only when they are issued; they are also bought and sold during their lifetimes. When buying a bond that has been around for a few years, investors should know that the interest rate printed on a bond is often not the same as the bond yield, even on new bonds. Read the next Work It Out feature to see how this happens.

## Calculating the bond yield

You have bought a \$1,000 bond whose coupon rate is 8%. To calculate your return or yield, follow these steps:

1. Assume the following:
Face value of a bond: \$1,000
Coupon rate: 8 %
Annual payment: \$80 per year
2. Consider the risk of the bond. If this bond carries no risk, then it would be safe to assume that the bond will sell for \$1,000 when it is issued and pay the purchaser \$80 per year until its maturity, at which time the final interest payment will be made and the original \$1,000 will be repaid. Now, assume that over time the interest rates prevailing in the economy rise to 12% and that there is now only one year left to this bond’s maturity. This makes the bond an unattractive investment, since an investor can find another bond that perhaps pays 12%. To induce the investor to buy the 8% bond, the bond seller will lower its price below its face value of \$1,000.
3. Calculate the price of the bond when its interest rate is less than the market interest rate. The expected payments from the bond one year from now are \$1,080, because in the bond’s last year the issuer of the bond will make the final interest payment and then also repay the original \$1,000. Given that interest rates are now 12%, you know that you could invest \$964 in an alternative investment and receive \$1,080 a year from now; that is, \$964(1 + 0.12) = \$1080. Therefore, you will not pay more than \$964 for the original \$1,000 bond.
4. Consider that the investor will receive the \$1,000 face value, plus \$80 for the last year’s interest payment. The yield on the bond will be (\$1080 – \$964)/\$964 = 12%. The yield, or total return, means interest payments, plus capital gains. Note that the interest or coupon rate of 8% did not change. When interest rates rise, bonds previously issued at lower interest rates will sell for less than face value. Conversely, when interest rates fall, bonds previously issued at higher interest rates will sell for more than face value.

how does economics define me
what are the factors that determines the demand and supply
sillah
what are the importance of Economics
tell me something very important about economics..
how may I solve arithmetic mean ,,,all example
what is agriculture
simple method of understanding cost concept
what is inflation
Inflation is a general increase in price levels
Zuko
is the action of inflating something
Abdifatah
inflation is the persistent increase in general price level of goods and services in an economy over a considerable period of time .
Tetteh
inflation is the general increase of a commodity in a particular period of time.
Turay
inflation is a general increase in price levels of commodities
shehu
what are the types of inflation?
Ebrima
inflation is the period of persistent rise in the general level of the price of goods services over time
Emmanuel
we have creeping inflation, demand pull inflation ,cost push inflation, and galloping inflation .
Emmanuel
how can a location of a firm create difference between producers
what is monetary policy
joy
hello
Abdifatah
is a monetary from policy that's authorized of country encharces
Abdifatah
What would you say about the the mobility of enterprise as a factor of production?
how can I connect myself to this Ambrose platform
I am good and you I am from sierra Leone and I am new her
u are welcome bro, here is a good platform for you to be
Alie
That i know,thanks bro.
what the main definition of economic
the main definition is given by prof Lionel Robbins as a social science which studies human behavior between ends and scarce which have alternative uses
olajumoke
what covers macro economics.
Fayaz
what is economics
what do you mean by means in economics
Julie
economic is the wealth of a country.
Moussa
monetary policy is refer to as being expansionary or contractionary.
Abdul
pls who can help me to explain money market and capital market
Au
money market is base on short term loan which is within one year period while capital market is long term loan more than one year...
money market is a market were short term loans are dealt with while capital market is a market were long term loans are traded
Ebrima
What is mean by monetory policy
Lovely
monetary polices are rules that control the rate of monetary exchange in an economic as a whole.
Ebrima
wealth of the nation
Uhara
important of unemployment
Important of unemployed
Otwe
important?
Aneela
Got questions? Join the online conversation and get instant answers!