Bonds — slides
Financial Literacy Club
Investing · Lesson 3
Bonds
Lending money to governments and companies in exchange for interest.
12-minute lesson · learnwithflc.org
Bonds · 1 / 20
Financial Literacy Club
Investing · Lesson 3
Bonds
Lending money to governments and companies in exchange for interest.
12-minute lesson · learnwithflc.org
Today's goals
By the end of class, you'll be able to…
- Explain a bond as a loan made by the investor
- Calculate yearly interest from a coupon rate and face value
- Explain why existing bond prices fall when interest rates rise
Warm-up
Would you lend $100 to a friend who always pays you back, or to a stranger? What would you charge each one?
Think, then write your answer.
The big idea
Bonds
Lending money to governments and companies in exchange for interest.
Investing · Lesson 3
A bond is a loan you make to a government or company. In return, the borrower pays you interest and repays the full amount on a set date.
Investing · Lesson 3
- Face value: the amount you'll be repaid, often $1,000.
- Coupon rate: the yearly interest, as a percentage of face value.
- Maturity date: when the loan ends and you get the face value back.
Investing · Lesson 3
U.S. Treasury bonds are backed by the federal government and considered among the safest. Corporate bonds usually pay more because companies are more likely than the government to default.
Vocabulary
Credit risk
The chance the borrower can't pay you back. Riskier borrowers have to offer higher interest to attract lenders.
Investing · Lesson 3
Bonds have a less obvious risk too: interest rate risk. If rates rise after you buy a bond, new bonds pay more, so your older, lower-paying bond is worth less if you sell it before maturity.
Investing · Lesson 3
Bonds generally move less than stocks and often pay steadier income, which is why many investors hold both.
See it
You lend $1,000 by buying a bond. The borrower pays you interest each year. At maturity, you get your $1,000 back.
You buy a $1,000 bond
You're the lender
Interest payments
For example, 4% = $40 a year
Maturity
Your $1,000 comes back
Real example
Leo's 10-year bond
Leo buys a hypothetical $1,000 bond with a 4% coupon that matures in 10 years.
- He receives $40 a year in interest — $400 over 10 years.
- At maturity, he gets his $1,000 back.
- Two years in, new bonds pay 6%. If Leo wanted to sell his 4% bond early, buyers would pay less than $1,000 for it. If he holds to maturity, he still gets the full $1,000.
Activity · whole class · 10 min
Bond Auction
- Three borrowers each want to sell a $1,000, 5-year bond: the U.S. Treasury, a large, stable company, and a brand-new startup.
- Students write the yearly interest rate they would demand from each; collect and post the class averages.
- Twist: interest rates rise and new bonds now pay 6%. Would anyone pay full price for an old bond paying 4%?
- Discuss what happens to the old bond's price.
Check for understanding · 1 of 3
You buy a $1,000 bond with a 5% coupon.
How much interest do you receive each year?
- A$5
- B$500
- C$50
- D$105
C. $50
5% of $1,000 = $50 a year.
Check for understanding · 2 of 3
Interest rates rise sharply after you buy a bond.
What happens to your bond's price if you try to sell it early?
- AIt usually falls, because new bonds pay more.
- BIt rises, because rates went up.
- CNothing — bond prices never change.
- DIt doubles.
A. It usually falls, because new bonds pay more.
That's interest rate risk. Buyers won't pay full price for a bond paying less than new ones.
Check for understanding · 3 of 3
Corporate bonds usually pay higher interest than U.S. Treasury bonds because companies are more likely to default.
- True
- False
True
Higher credit risk requires higher interest to attract lenders.
Remember
Key takeaways
- Bond = a loan you make. Stock = ownership.
- Coupon rate × face value = yearly interest.
- Riskier borrowers pay higher interest.
- When rates rise, existing bond prices fall.
Discuss
Talk it over
- Why would anyone buy a bond instead of a stock?
- How is buying a bond similar to a bank lending you money?
Exit ticket
Fill in: A bond is a ___ you make. A stock is ___.
Answer on your exit ticket before you leave.
Nice work today.
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