ENGINEERING ECONOMY

Lesson 6
Bonds
Prepared by:
Engr. Leo Abaquita
Learning Outcomes
1. To know and understand what are Bonds, its purpose and
application.
2. To learned how to use the formula of Bonds to the problems.
3. To understand the formula for calculating the bonds.
What are “Bonds”

Unlike stocks, bonds don’t give ownership rights. They represent

as a loan from the buyer (you) to the issuer of the bond.

 Bonds can be issued by companies or governments and generally

pay a stated interest rate.

 The market value of a bond changes over time as it becomes more

or less attractive to potential buyers.

 Bonds that are higher-quality (more likely to be paid on time)

generally offer lower interest rates.

 Bonds that have shorter maturities (length until full repayment)

tend to offer lower interest rates.
Bonds are issued by governments and corporations when they
want to raise money. By buying a bond, you're giving the issuer
a loan, and they agree to pay you back the face value of the loan
on a specific date, and to pay you periodic interest payments
along the way, usually twice a year.

Unlike stocks, bonds issued by companies give you no

ownership rights. So you don't necessarily benefit from the
company's growth, but you won't see as much impact when the
company isn't doing as well, either—as long as it still has the
resources to stay current on its loans.

Bonds, then, give you 2 potential benefits when you hold them
as part of your portfolio: They give you a stream of income, and
they offset some of the volatility you might see from owning
stocks.
Maturity & duration
A bond's maturity refers to the length of time until you'll get the
bond's face value back.

As with any other kind of loan—like a mortgage—changes in

overall interest rates will have more of an effect on bonds with
longer maturities.

For example, if current interest rates are 2% lower than your rate
on a mortgage on which you have 3 years left to pay, it's going to
matter much less than it would for someone who has 25 years of
mortgage payments left.
Because bonds with longer maturities have a greater level of risk
due to changes in interest rates, they generally offer higher
yields so they're more attractive to potential buyers. The
relationship between maturity and yields is called the yield
curve.
In a normal yield curve, shorter maturities = lower yields
Companies can issue bonds, but most bonds are issued by
governments. Because governments are generally stable and can
raise taxes if needed to cover debt payments, these bonds are
typically higher-quality, although there are exceptions.

Certain types of Treasuries have specific characteristics:

Treasury bills - have maturities of 1 year or less. Unlike most

other bonds, these securities don't pay interest. Instead, they're
issued at a "discount"—you pay less than face value when you
buy it but get the full face value back when the bond reaches its
maturity date.
Treasury notes - have maturities between 2 years and 10 years.
Treasury bonds - have maturities of more than 10 years—most
commonly, 30 years.
THANK YOU!