Bonds¶

Bonds are financial instruments that have two types of cashflows. The first type is coupon payments which are periodic payments where as the second type is the principal payment at the end of the bond. The principal payment is a large payout where as the coupon payments are much smaller but frequent payments. The principal is also called the face value. Let’s begin with seeing what this looks like on a timeline. Let’s say we have a bond with a \$1000 face value which also pays a 2% coupon (equal to \\$20) every year over 5 years. Then we receive \$20 in all years except the last one where we get that coupon plus the face value of \\$1000.