# Bonds

A bond is a promise made by a borrower to pay back a lender the amount borrowed (face value) at the bond's maturity date, plus periodical interest payments.

In essence, it's when one party borrows from another, and promises to pay back the amount at a later date, along with interest payments along the way (called annuities).

When working with bonds, you might be prompted with a base-line situation like this:

Scenario: Your lemonade stand is doing well, and you want to expand your capital to produce more lemonade. In order to do so, you take out a 5-year bond from your local bank for \$1,000 at a 5% stated annual interest rate.

We're given the bond amount here...

Scenario: Your lemonade stand is doing well, and you want to expand your capital to produce more lemonade. In order to do so, you take out a 5-year bond from your local bank for \$1,000 at a 5% stated annual interest rate.

...and told that it has a "stated" 5% annual interest rate.

Scenario: Your lemonade stand is doing well, and you want to expand your capital to produce more lemonade. In order to do so, you take out a 5-year bond from your local bank for \$1,000 at a 5% stated annual interest rate.

What this means is that to compute the annuities (a.k.a. interest payments) for each of the 5 years we hold the bond...

Scenario: Your lemonade stand is doing well, and you want to expand your capital to produce more lemonade. In order to do so, you take out a 5-year bond from your local bank for \$1,000 at a 5% stated annual interest rate.

...we must do the following calculation...

Interest Payment = Face Amount x Stated Annual Interest Rate
Interest Payment = \$1,000 x 5%
Interest Payment = \$50

...resulting in annuity payments of \$50 for each of the 5 years!

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