An explanation with an example would be greatly appreciated. Thank you 🙂
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A bond is a loan. Bonds are forms of debt that can be issues by government or other large organizations. When you get a loan, you are given an interest rate, payment calendar, and payment amount. A bond is the exact same, except the entity soliciting the loan gets to make the rules. So, they choose to pay back the loan at the end of the life of loan, instead of on a monthly basis. This allows the entity some flexibility to try and invest the debt to recoup money. If the bond interest rate is 2% annual and the entity is confident they can make a 5% return annually on the capital, then issuing the bond makes sense.
In the case of saving bonds, the entity in question is the government. This is because the debt is considered risk less, the only way you won’t be paid your money is if the government literally failed. This is because the government can just print money to cover the cost of the bond. When you get a bond, you are told what the interest rate is, and that is fixed. So a 30 year bond with a face value (the payment amount at the end) looks like this:
x(1+interest)^30 = 1000 —> x=1000/(1+interest)^30
Given an interest rate, you can calculate how much you need to loan the government to get the bond. At the time of expiration, you are paid the full $1000. If you want to give the government more money, you can simply purchase several bonds with face value $1000.
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