A bond is a loan with a fixed timetable

Describe any bond by its face value, coupon and maturity, and list the payments it promises.

Many people think bonds are complicated instruments that fund managers trade on screens, so they leave them alone. Without the jargon, a bond is a simple deal. You lend money, the borrower pays you interest on a fixed schedule, and repays your money on a set date. The rest of the course adds detail to that one promise.

Three numbers describe the promise. The face value is the amount you lend and get back at the end. It is often quoted as 100, so a bond's price can be read as a percentage of its face value. The coupon is the interest rate the borrower pays on the face value, usually once or twice a year. The maturity is the date the face value is repaid and the payments stop.

Once you know those three numbers, you can list every payment the bond will make before you buy it. Take a company bond with a face value of S$1,000, a coupon of 3% paid once a year, and a maturity five years from now (invented figures). 3% of S$1,000 is S$30 a year, which you receive at the end of each of the next five years. At the end of year five you also get your S$1,000 back. The full list is five payments of S$30 and one payment of S$1,000. The bond's terms do not change those amounts.

The same method works on any bond. Find the face value, then the coupon rate and how often it is paid, then the maturity date. Multiply the coupon rate by the face value to get each coupon payment and place one at each interval until maturity. Then add the return of the face value on the maturity date.

A bond works differently from a share. A shareholder owns part of a business and gets whatever it earns, which could be a lot or nothing. A bondholder is a lender. Your payments are fixed in the contract and you get no share of any extra profit. In return, bondholders are paid before shareholders if the business gets into trouble. You give up the upside in exchange for a clearer payment timetable.

That fixed timetable is only as good as the borrower. Suppose the company in the example goes under in year three. The remaining payments may arrive late, arrive only in part, or never arrive. This is credit risk, and it is the reason a small company's bond pays a higher coupon than a Singapore Government bond. The extra interest pays you for the chance that the promise is broken. Module 6 shows you how to judge credit risk.

You also do not have to hold a bond until maturity. Many bonds can be sold to another investor first, and the sale price depends on what interest rates are doing at the time. If newer bonds pay more than yours, buyers will pay less for your bond. This is the trade-off between price and yield, which Module 2 covers. Once that link makes sense, most bond news starts to make sense as well.

Every product in the course uses the same three numbers, even when they go by other names. A Singapore Savings Bond (SSB) has a face value, interest payments and a ten-year maturity. Its unusual feature is that you can get your money back early. A T-bill has a face value and a maturity of a year or less, but no coupon. You buy it below face value, and the difference between what you pay and the face value you get back is your interest. A fixed deposit is not a bond, but it works on the same idea of lending money for a fixed term at a stated rate. Later in the course you will compare fixed deposits and bonds side by side, which is one of the most useful things you will do here.

Bonds, bills and deposits are for money with a job to do on a known date, and for money you cannot afford to see fall by a third in a bad year. They are not a way to get rich. The skill the 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.

Pick one real bond, SSB or fixed deposit. Using the terms on its official page and a S$1,000 holding, write out every payment it will make.

Course

• Bonds, T-bills, SSBs and fixed deposits