Bonds

Imagine your mate asks to borrow ten thousand dollars to open a food truck. You agree, but with conditions. He pays you five hundred dollars every year as a thank you, and he gives back the full ten thousand in five years. You shake hands. Congratulations, you just bought a bond. The five hundred a year is your coupon payment. The ten thousand coming back is your principal. And the five years is the maturity date. That handshake is the oldest financial deal in existence. Governments have been doing it for over five hundred years to fund wars, roads, and everything in between. Now here is where it gets interesting. Two years in, your mate's food truck is thriving. Another friend offers to buy your handshake deal off you for eleven thousand dollars, because that guaranteed five hundred a year looks attractive. Your bond just increased in value. But if a new food truck across the street starts offering investors six hundred a year for the same ten thousand, suddenly your deal paying five hundred looks less appealing.