A bond is a loan with a fixed timetable

You will be able to describe any bond in terms of face value, coupon and maturity, and list the payments it promises.

Most people think of a bond as something complicated that fund managers trade on screens. Strip away the jargon and it is the most ordinary deal in finance: you lend money, the borrower pays you interest on a fixed schedule, and on a set date they give your money back. That is all a bond is. Everything else in this course is detail on top of that one promise.

Three numbers describe the promise. The face value is the amount the borrower agrees to repay at the end, often quoted as 100 so that prices can be read as a percentage. The coupon is the interest rate the borrower pays on that face value, usually once or twice a year. The maturity is the date the loan ends and the face value comes back to you. If you know those three things, you can write out every payment the bond will ever make before you buy it.

Try it with made-up figures. A company issues a bond with a face value of S$1,000, a coupon of 3% paid once a year and a maturity five years from now. You will receive S$30 at the end of each of the next five years, plus your S$1,000 back at the end of year five. That is the full list: five payments of S$30 and one of S$1,000. Nothing in the bond's terms will change those amounts.

This is the first thing that makes bonds different from shares. A shareholder owns a slice of a business and gets whatever the business earns, which could be a lot or nothing. A bondholder is a lender. The payments are fixed in the contract, and the bondholder has no share in any extra profit. In return, the bondholder gets paid before shareholders if the business runs into trouble. You give up the upside to buy a clearer timetable.

The second thing to notice is that the fixed timetable is only as good as the borrower. If the company above goes under in year three, the remaining payments may arrive late, arrive partly, or never arrive. That is credit risk, and it is the reason a bond from a small company pays a higher coupon than one from the Singapore Government. The extra interest is payment for the chance that the promise is broken. You will learn to judge that risk in module 6.

The third thing is that you do not have to hold a bond until it matures. Many bonds can be sold to another investor before then, and the price you get will depend on what interest rates are doing at the time. If newer bonds are paying more than yours, buyers will pay less for your bond. That trade-off between price and yield is the subject of module 2, and once it clicks, most bond news starts to make sense.

You will meet the same three numbers in every product in this course, even when they are called something else. A Singapore Savings Bond has a face value, interest payments and a ten-year maturity, with an unusual twist that lets you get your money back early. A T-bill has a face value and a maturity of a year or less, but no coupon at all: you buy it for less than face value and the gap is your interest. A fixed deposit is not a bond, yet it works on the same idea of lending money for a fixed term at a stated rate, and comparing them side by side is one of the most useful things you will do in this course.

Before you go further, it helps to say plainly what this end of the market is for. Bonds, bills and deposits are where you put money that has a job to do on a known date, or money you cannot afford to see fall by a third in a bad year. They are not where you go to get rich. The skill this course teaches is matching the right instrument to the right pot of money, and knowing exactly what you have lent, to whom, and when it comes back.

Your task: take any bond, SSB or fixed deposit you can find details for, on a bank, MAS or SGX page, and write down its face value, its interest rate, how often interest is paid and its maturity date. Then write out every payment it will make in a simple table, using a S$1,000 holding.

Write out the full payment table for one real bond, SSB or fixed deposit, using a S$1,000 holding and the terms on its official page.

Course

• Bonds, T-bills, SSBs and fixed deposits