The name’s Bond, Corporate Bond

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Hello and thanks for choosing to read this blog series on Bonds! 

If you don’t know anything about the Bond Market then trust me keep reading.

My aim is to explain the basics of bonds using topics from the WiseAlpha Bond Academy, a free course that currently offers five hours of accredited CPD activity. 

And why should I read this blog? 

I work for an innovative start-up company called WiseAlpha in the multi-trillion dollar FinTech industry. 

I’m relatively new to the world of bonds so look at me as a living case-study for how quickly you can learn about them. 

As part of our plans to introduce our free education program to a wider global audience, I want to provide an insight into bonds but from a beginner’s perspective.

Thanks for reading so far. 

…soooo, what is a bond?

In short, a bond is a debt.

As of December 2020 the total debt outstanding in the world was valued at a staggering $277,000,000,000,000 (277 trillion dollars). 

Wait go back, what do you mean it’s a debt?

To put it simply, governments and corporations issue debt to raise cash.

No money, no problem!

I still don’t understand?

It’s okay – neither did I so don’t worry!

The best way to explain the concept of bonds is with an example – so let’s take Netflix for now. 

Netflix is currently the world leader in the online entertainment industry by revenue, specialising in online media streaming and video-on-demand online.  

In 2019, Netflix attempted to raise €1,100,000,000 (1.1 billion Euros) from investors.

A billion Euros!? For what?

Well, for example, in 2020 the estimated production budget of The Crown (the show about Queen Elizabeth II) was reported to be $260 million, making it one of the most expensive television series in history

Did Netflix get the money they were looking for?

Yep. Netflix successfully raised €1.1bn from investors.

This is a Corporate Bond.

Therefore, Netflix issued a corporate bond worth €1.1bn. 

Why would Netflix even attempt to raise this kind of money in the first place?

The benefits Netflix receive from producing its planned content include financial growth (which can be used to repay the debts) and potential record-breaking streaming statistics. 

These two reasons give investors an explanation for the debt that Netflix is issuing, also known as the “Use of Proceeds” (UoP)

Investors see this as an opportunity to make money. 

How will the investor make money if they are giving away €1.1bn of their own money? 

Netflix has incentivised the investment. 

Netflix has told investors that they will fully repay the €1.1bn back in 10 years’ time. 

Therefore, 2029 is known as the maturity date

By then, Netflix would have (hopefully) generated enough cash from the film that they will be able to repay the €1.1bn by maturity. 

If not, Netflix could even borrow from someone else (i.e. issue another corporate bond) to refinance the existing debt. 

Okay…but how will the investor make money?

Until 2029, Netflix will offer regular interest payments to the investors. 

This is known as a coupon payment. 

The coupon payment or interest rate is dependent on many factors such as how stable the company is, how well the industry is doing, or the economic climate. 

For example, let’s assume investors are relatively happy with Netflix’s business and continue to see the online streaming industry growing into the future.

If investors were super confident that the business will grow very strongly due to the recent pandemic shutting down all cinemas and the encouragement of people to stay indoors, this would lower the coupon rate and lower the potential yield because Netflix is now seen as a less risky investment.

If, however, Netflix suddenly gained ten new competitors because of the online streaming boom, they could potentially lose customers to other streaming platforms and may lose business as a result. 

This would make them a riskier investment, therefore, the yield would increase and they could potentially go bust.

Cool that makes sense but some figures would help me understand more clearly. 

Okay – Netflix can offer to pay the coupons annually (once a year), semi-annually (twice a year), or quarterly (four times a year). 

Using our earlier case study, in 2019 Netflix offered to pay 4.625% a year on a semi-annual basis (so 2.3125% every six months), for the next ten years. 

By the way, don’t let the percentages and big numbers scare you – it’s easy to understand!

Below is a summary of all the payments that would happen in the €1.1bn investment in Netflix:

Year 1 – 2019:

– €1,100,000,000 payment to Netflix

+ 2.3125% coupon payment from Netflix = €25,437,500 in May

+ 2.3125% coupon payment from Netflix = €25,437,500 in November 

Year 2 to 9 – 2020 to 2028

+ 2.3125% coupon payment from Netflix = €25,437,500 in May

+ 2.3125% coupon payment from Netflix = €25,437,500 in November 

Year 10 – 2029:

+ 2.3125% coupon payment from Netflix = €25,437,500 in May

+ 2.3125% coupon payment from Netflix = €25,437,500 in November  

+ €1,100,000,000 initial investment back from Netflix

So what does this mean then?

To clarify, by Year 10 the investors received in total €1,608,750,000 (€1.6 billion).

This is a €508,750,000 (€508.75 million) increase in their initial investment. 

This calculates to an incredible return of 46.25% over 10 years (4.625% per year) which is a very attractive investment opportunity for the financial elite. 

46% return! Why have I not heard of this before!?

Unfortunately, corporate bonds are only investible with a minimum contribution of £100,000 which makes it inaccessible to a large majority of the population. 

So that’s the basics of Bonds!

It always feels good to learn a new concept. 

Bonds are easy to understand without all the complicated terminologies. 

They do get more technical and complex as you delve deeper into the financial technicalities but we don’t need to worry about that just yet.

What else can I learn?

Good question. Our Bond Academy is a great way to learn more about bonds. 

The purpose of this blog series is to teach you about the multi-trillion-dollar industry and there will be more educational pieces coming soon such as different types of Bonds, Markets, and Yields, as well as Credit Ratings and Bond Security. 

Until then, please sign up to our Bond Academy to learn more and gain some free CPD accredited activity.