How do Bonds Work Part 1:With Real Corporate & International Government Examples

Chris Haroun
A free video tutorial from Chris Haroun
Award Winning MBA Professor, Venture Capitalist and Author.
4.5 instructor rating • 54 courses • 1,028,875 students

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The Complete Personal Finance Course: Save,Protect,Make More

3 Courses in 1! Save,Protect & Make More! By an Award Winning MBA Professor, VC & Best Selling Online Business Teacher.

15:46:12 of on-demand video • Updated April 2021

  • Upon completion of this course, students will be able to save, protect and make much more so that their net worth is significantly higher in the long run. You will be a personal finance expert by the end of this course!
  • How to profit from the INCREDIBLE Power of Compound Interest
  • 100+ Ways to Save More…Including the following ways:
  • 14 Ways to Save More on Taxes
  • 16 Ways to Save More on Shopping Expenses
  • 13 Ways to Save More on Car/Transportation Expenses
  • 10 Ways to Save More on Housing Expenses
  • 5 Ways to Save More on Vacation Expenses
  • 4 Ways to Save More on Gifts & Donation Expenses
  • 6 Ways to Save More on Phone/Computer Expenses
  • 13 Ways to Save More on Food & Drinks Expenses
  • 7 Ways to Save More on Debt Expenses
  • 4 Ways to Save More on Education Expenses
  • 7 Ways to Save More on Entertainment Expenses
  • 6 Ways to Save More on Fees Expenses
  • 5 Ways to Save More on Child/Child Care Expenses
  • 4 Ways to Save More on Health Expenses
  • 5 Ways to Save More on Personal Care Expenses
  • 5 Ways to Save More on Pet Related Expenses
  • How to Change Your Perception of Money
  • How to Teach Your Children About Saving
  • How to Protect Your Money by Understanding Your Net Worth (Creating and Understanding Your Balance Sheet….Meaning “What You Own and What You Owe”)
  • Understand if You Should Hire a Financial Advisor to Help Protect Your Money
  • Understand Why Hiring an Accountant Might be the Best Investment You Might Ever Make
  • How Taxes + Retirement Accounts Work & Why We Need to Minimize How Much Tax We Pay
  • How Much You Need to Retire
  • Understand and Taking Advantage of Tax Incentives, which Help You Save BIG TIME for Education/School Expenses
  • How Much You Need for Education Expenses (for You or Your Kids)
  • How to Create Your NEW & IMPROVED Income Statement (Meaning Understanding Money In and Money Out)
  • Understand Your Company Sponsored Tax Savings Plans (if Applicable)
  • Use a Simple & Effective Money, Taxes, Receipts and Statements Filing System
  • Understand What are the Best Websites & Apps to Help You Track and Manage Your Spending
  • Use Quicken on a PC to Manage Your Money
  • Use Quicken on a Mac to Manage Your Money
  • Protect Your Money by Making a Monthly Budget
  • Avoid Getting Ripped off on Fees
  • Understanding Wills and Trusts
  • View, Understand and Fix Your Credit Score/Rating (So You Can Get a Loan or Mortgage)
  • Understand Life Insurance
  • Understand Auto Insurance
  • How to Pay Less Tax Strategies
  • Understand Home and Property Insurance
  • Understand Health Insurance
  • Prevent Identity Theft
  • Understand Credit Cards
  • Understand Loans
  • Understand Leases
  • What Are the Qualities of Billionaires (5 Characteristics of Billionaires I Have Worked For)
  • Understand the Damage that High Investment Fees Can do to Our Net Worth!
  • Make More by Learning How to Avoid Paying High Investment Fees
  • Understand Why and How to Pick Investments from Index Funds
  • Manage Your Investments with Your Investment Portfolio Management System (Included in the Course)
  • Populate Your Investment Portfolio Management System (meaning Your Portfolio)
  • How to Invest in Stocks and 4 CRUCIAL Stock Investing Rules
  • Investment Data Basics
  • Understand Risk Management
  • Understand What Makes Stocks, Bonds, Commodities and Real Estate Investments Go Up or Down
  • How to Do Your Own Investment Research (and Never Rely on the “Pros”)
  • Understand Mutual Funds
  • Know What Warren Buffett’s Favorite Types of Investments Are
  • Understand Interest Rates, Bonds and “The Bigger Picture”
  • Know How Global Economics Works and Why this Matters to Personal Investors
  • How & Why Do Interest Rates Change & Why this is Important for Investors to Understand?
  • Understand Foreign Exchange Currency Movements
  • How Bonds Work and How Can Governments Stimulate the Economy?
  • Understand Real Bonds - No Theory! (With Real Corporate and International Government Bond Investment Examples)
  • How to Invest in Bonds
  • Add Bond Investments to Your Portfolio
  • How to Invest in Commodities
  • Add Commodity Investments to Your Portfolio
  • Introduction to Your Most Important Personal Investment & How Much Should to Spend on a House
  • How Mortgages Work & How to Calculate Payments (Fixed Rates Versus Interest Only Rates & More)
  • How to Calculate Mortgage Payments and Know What Happens When Rates Change
  • What You Need to Know if Considering Investment Properties
  • How Much to Spend on an Investment Property
  • Understanding Real Estate Investment Trusts
  • Adding Real Estate Investment Trust Investments to Your Portfolio
  • Investment Types to Consider Avoiding Given Liquidity Risks
  • Diversification Strategies and Your Diversified “Model Portfolio”
  • Should You Start Your Own Business & Have >1 Income Stream? 100% YES!
  • Customize Your Own Complete Personal Finance Excel Dashboard (I Will Teach You How to Customize and Create Your Own Version of the Excel Dashboard Document Used for ALL 25 Exercises in this Course)
English -: We know that companies can raise money by selling stocks so that we the stockholders or shareholders, same thing, we own part of that company, which is also known as equity. So remember when we discussed your balance sheet earlier in the course, we know that assets equals liabilities plus equity. So if a company wants money to help their business grow they need to raise cash, right? Which is an asset, they need to raise cash. So, let's say IBM... Let's say IBM wants to raise a hundred million dollars. Well, what they can do is they can either sell more shares or get a loan. Okay? They can do that. They can either sell more shares or get a loan. Either way, cash will go up by a hundred million. So cash is an asset, okay? And here is an IBM share. Okay? So, what happens is if you buy one of these shares IBM gets to put money in their bank account but the equity goes to you. So they can either get more cash by raising debt, or selling part of the company, selling equity, okay? One share of IBM looked like this many years ago and what happens now is a lot of this stuff is electronic but this is an IBM share, right? And IBM stands for "Industry's Biggest Mistake." No more Dad humor, I promise. Okay. So, this is what it looks like. It's got the name of the person that owned it at that point in time, some dude from Tulsa, Oklahoma. Right? And you couldn't forge it because it had these little dots on it that you can rub off. Anyway, that's what it looked like. This is one share of IBM, that's what it looked like. Now let's say that IBM decides that if they issued new shares, then some investors would get mad as the number of shares would go up, which means that there is the same amount of earnings divided by more shares. So the earnings per share would go down, right? So the price to earnings ratio would look worse, right? It would actually go up and investors might get upset. And so IBM might decide, "Okay, we're not gonna issue "shares then. What we'll do is this: "We will get a massive loan for a hundred million dollars." Right? It's a huge amount, a hundred million. And a bank might not have enough money to lend them a hundred million dollars. So what does IBM do? They decide they will raise debt, not just from one bank but from many, many, many, many banks and many, many, many, many people. So what does that mean? Well, IBM does this by raising a hundred million dollars from thousands of investors all over the world like you and I, by issuing debt to you and I in the form of a bond. Yes, we are going to lend money to IBM, right, and this is called a bond. So, how does that work, the whole process? Well, we each give IBM money, and in return we get interest on the loan, meaning the bond to IBM. Well, in the old days, when you would buy a stock you would get the stock's certificate as proof, which I just showed you, that you own the stock. For example, if you invested in IBM in the 1970s, they would send a certificate to your house like the one I just showed you. Today, you get electronic ownership of a stock and so you actually don't get a certificate like that, as cool as it looks like. Now, the reason I wanted to show you this stock certificate is because it's easier for you to visualize and understand how bonds work. So, we're now gonna put some more layers on this, okay? So, this here is a bond from 1913. It's a New York central real estate bond. And you could actually buy these things for really cheap on eBay, right? And you see these things here? These are all coupons. Like, real money. You clip these coupons off and you get money for it, okay? There's lots of coupons. Lots and lots of coupons. I'll explain what this means. And the railroad company probably issued this bond so they could build more train tracks, which costs a lot to do. Alright. And this here, oh the coupon just fell, --. Okay. This here is an example of a government bond, with coupons. Okay? The coupons just fell off. This was, these two were here, there's actually two coupons here that you would clip off. Okay? And this is a Russian bond, I bought it over eBay, it came from Latvia the other day, and if anybody can read what this means, please tell me. It looks like it's from 1916, so it was probably used to fund World War I, I think. So, anybody speak Russian out there, put it in the Q&A field for us to understand. Okay. Anyway. That's an example of an international bond. And this one here actually is from the city of Los Angeles. Okay? So this is a Los Angeles issued one from 1927. And there's lots and lots of coupons here, bear with me please. Ah! Sorry. Yeah, these are little coupons on the side here. It's in remarkably good condition for a piece of paper from the 1920s. So, what you would do, I'll actually do it right now, is, you would rip one of these coupons off. They cut them, actually, there's no dotted line, but you cut it off, and then you submit it and you get a coupon bond for it. And they actually wrote on them, "nine dollars, "19 dollars, 67 dollars." That's really interesting. And you can't see that closely, or maybe you can, I'll hold it against my shirt, but it says "canceled." Right? The dots through it. I always thought canceled had two L's, apparently it has one. So anyways this is a bond issued by the state of California. Okay? It's pretty cool. The city of Los Angeles. So, traffic is a nightmare in L.A., so they clearly didn't raise enough money, but you can see here that the coupons here are cashed every six months. I can see the dates up closely, you can't, sorry. But anyway, in the early 1980s, I'll give you another example here, this one's more interesting I think. Okay. In the early 1980s the Walt Disney Corporation wanted to build a massive theme park in France. And I remember it was very controversial for many reasons at the time, one of which was the cost. And the cost was going to be insanely high and Disney didn't have the money. Right? And so they could've issued more stock, more shares to investors in the stock market, issue more equity. But the problem is a lot of investors would've been upset because what would happen is it would dilute how much money Disney makes per share. So what'd Disney do instead? Well, what they did was they did a debt offering. They issued Euro Disney bonds in order to finance this massive investment. It's the only way they could finance it! Right? And you see the coupons back here. Right? I don't know if you can see that, Chris, maybe in post-production zoom in there, okay? Okay, now you understand what coupons are for, right? You'd buy a bond and then you'd mail in these coupons, or give a coupon to a bank and then you'd get cash, right? Now, that assumes the companies or the government agencies have money to give to you for these coupons every six months or so, okay? And so with this bond here issued by the New York Central Railroad Company. It's a thousand dollar bond, see here. A thousand dollars paying four and a half percent per year. Right? That means that you get four and half percent interest on it. And what they would do is they would pay you the equivalent of that every six months. And so once you clipped all these coupons off, see, they're numbered here, where it looks like cash. Then what happens is you get back your initial investment which, in this case, is a thousand dollars. That's the par value, okay? So, anyway, that's how that one works. They're all quite similar, but now you know why they call it coupons, it's kind of interesting. Kind of interesting. Okay, there's a good reason why I showed you these bond documents. Because it's going to make it way easier and more interesting for me and for you to learn how bonds work. Bear in mind with me for one minute, please, here, okay? Now we understand how bonds work that have coupons, because we give a government like Russia or a company like the New York Railroad Company or Disney money, okay? We give them money and in return they give us a piece of paper that says, "You gave us this much money "and you can get all that money back that you gave us "in a certain number of years, and you know what? "As a way to say thank you for investing with us, "you can take a coupon off every six months and make money "okay? And that's a dividend coupon. Okay? So. "When the bond expires, or when it's mature, "then you get your entire amount of money back." Okay? That's part of the contract that you see in these documents, right? All these little disclosures and they were hard to read back then because that's actually cursive writing. It's hard to read. Anyway.