Risk Curve

Finance allah shmoop what is a risk profile Hello You

know that song Hello By adele You know you've heard

it like eight thousand times Hello How are you Yeah

So think of the you today wondering whether you should

loan money to the you of ten years ago Hello

with you How much And on what terms What details

would you have wanted to glean before you wrote the

check for your hard earned money to risk being fully

lost on the flaky you of ten years ago Okay

so dialing it back here the key vocab words you

must know the key components to a bond The principle

it's the base amount of a bond loan that dollar

amount that is loaned before interest and fees or commissions

or taxes or anything else in the world of corporate

bonds and most government bonds The base amount is usually

in multiples of a thousand bucks And for larger accounts

it's five thousand bucks And these air called bond denominations

of thousand dollars Five thousand dollars Ten thousand a hundred

thousand All denominations you know like a denomination for best

bond in a short film category goes to the t

bill the principal in a mortgage style bond is the

amount the bank is loaning Use you khun by your

three bedroom picket fence quarter acre house with you know

basement dungeon dream home fifty shades of home If you

put one hundred grand down and borrowed four hundred thousand

dollars is your mortgage from the bank to pay five

hundred thousand dollars for the dream home of your life

Your loan principal is yes four hundred thousand dollars Well

in most bond scenarios the principle can be and is

bought in sold just like any other security So in

the case of the you loaning money teo you let's

say the older you realize is that you take too

much risk in life You followed your dreams Try to

become a rock star rather than listening to your nightmares

Age forty homeless and broke That's how you ended up

trying to say so The older you cells that bond

to someone else who doesn't mind your maniacal focus on

head banging metal band practice or at least unlike the

older you doesn't view that as a fundamental risk in

them Paying back the money they borrowed Well bonjour typically

issued in these thousand dollars base units or their par

value or face value but they're quoted in units of

one hundred go figure that is a bond Units selling

for one thousand twenty five dollars would be quoted as

one oh two and a half and when you buy

the bond you pay one hundred three cents on the

dollar The cellar of a bond gets one oh two

and a half cents on the dollar in the fifty

cents goes to the agent there Got it And i

get really technical Bonds are usually quoted as a spread

like this like a play bond issue Here's mr november

That is one oh two and a half by one

of three which means that if you're the buyer of

the bond you pay one hundred three cents on the

dollar And if you're the seller of the bond you

get one hundred two and a half cents on the

dollar That's spread which pays the person making the market

in the bonds or the broker is one Oh three

Oh minus one o two Five equals yet five bucks

so when you do buy a bond you'll buy it

in one of two ways Well in the olden days

there were a lot of bearer bonds meaning the bearer

or the person who had the bond in their possession

like in their wallet owned it like a bill like

a paper bill Basically back then you could carry around

bonds just like they were cash and there was no

trail in the same way There's really no trail on

a twenty dollar bill you just downloaded from aversa teller

a tm nonunion robot But because barry bonds are really

not the best thing to be carrying around folded in

your wallet the trend quickly became to issue new bonds

as registered mainly so that they could be held elektronik

lee and save the murder of millions of trees and

or sheep Today most bonds don't even carry a p

paper attributes Rather the buyer gets an email more or

less with a bond registration number and those bonds are

usually held inside of the buyers mutual fund or hedge

fund Or if it's a consumer buying the bond and

number just shows up in their fidelity Schwab betrayed or

other online brokerage account So today bonds don't get a

certificate there issued in book entry form Well the transfer

agents just keep elektronik records of the bonds and their

little scriven er's ledgers The names and addresses and data

of the buyer and seller are copiously stored but there's

no subsequent paper paperwork that goes along with it And

all of this is really cool to now be elektronik

But back in the day bonds were actually printed and

some of the artwork was actually pretty cool Note that

it's par value is ten thousand bucks and it has

really pretty borders Ok next big element of a bond

is the nominal rate nominal It means in name So

on the face of the bond certificate there will be

a named interest rate Take a look at this bond

right here jonathan do Well here's the nominal or face

amount and it says four percent So this piece paper

backed by the company solar city now owned by tesla's

pays four percent interest Let's pretend the bonds a thousand

dollars unit well That means the registered owner of this

bond is due to be paid twenty bucks twice a

year or forty dollars a year as interest payment on

that thousand dollars they're renting So the quick summary you

buy a bond for twenty five thousand dollars that pays

eight percent a year and see how we're changing this

up on you to make life difficult The principal's twenty

five grand The interest payment is two grand a year

or a thousand dollars every six months because that's how

bond's role They pay interest twice a year The nominal

rate of the bond maybe eight percent But if you

had to pay a premium of say thirty grand instead

of twenty five grand for that quote eight percent paper

unquote Well then you won't actually be getting an eight

percent return on the thirty grand you invested You'll still

get the two grand a year which is to over

thirty or about a six point seven percent return If

you really want to feel connected with dead bad grandpa

well you can try to find barry bonds which are

like hold ten thousand dollar bills But you'll have a

whole lot more luck finding a wide selection of funds

in the registered isle of the bond grocery storage Schwab's

good stuff Get the sauce