Money Lessons with Andrew Temte, PhD, CFA
Episode: Bond Mechanics: How Bonds Actually Work
Date: January 17, 2026
Host: Andrew “Andy” Temte

Episode Overview

In this episode, Dr. Andrew Temte demystifies the inner workings of bonds, peeling back the layers on what happens when you purchase a bond and how its value and returns are determined. Using accessible language, historical context, and simple math, Andy explains what bonds are, how they’re structured, and the critical mechanics that drive their pricing in the modern financial markets. The episode provides a practical foundation for anyone looking to better understand these essential investment tools.

Key Discussion Points and Insights

1. What Is a Bond?

(00:52–02:35)

• Definition: “At its core, a bond is remarkably simple. It's an IOU. When you buy a bond, you're lending money to someone—a government, a corporation, or a municipality—and they are promising to pay you back with interest.”
  (Andy Temte, 01:11)

• Contrast with Stocks: Instead of partial ownership as with stocks, bonds make you a creditor with a legal claim to promised payments, regardless of the borrower's performance (unless they default).

• Legal Contract: Bonds formalize the lending arrangement, making the promise of repayment and interest official.

2. The Three Key Numbers of a Bond

(02:36–05:57)

• Face Value (Par/Principal Value): Usually $1,000; the amount repaid at maturity.

• Coupon Rate: The annual interest expressed as a percentage of face value.

  • “A bond with a 5% coupon pays 5% of its face value in interest each year.” (Andy Temte, 03:10)

  • Fun Fact: The term ‘coupon’ comes from physical coupons bondholders once clipped and mailed in to receive interest—“this is where the phrase clipping coupons originated.” (03:32)

• Maturity Date: When the borrower must repay face value—can be 1, 5, 10, 30 years, etc.

• Example Used:

  • $1,000 bond
  • 5% coupon
  • 10-year maturity
  • Pays $50/year (usually split into $25 every six months, following the standard set by railroad companies in the 1860s)
    (“Pacific Railroad bonds from 1865...paid interest every May 1 and November 1, a pattern that continues in bond markets today.” — 05:12)

3. Bond Payments: Semiannual Interest Explained

(04:40–05:57)

• Interest payments are commonly made twice a year, a practice originating in the 1800s and still standard.

• “Picture owning this bond. Every six months, a payment of $25 arrives in your account. This continues like clockwork for 10 years, 20 total payments of $25 each.” (Andy Temte, 05:29)

4. Bond Pricing: Par, Premium, and Discount

(05:58–08:15)

• Trading Above or Below Par: Bonds rarely trade exactly at face value in the market—they move above (premium) or below (discount) based on current interest rates.

  • At par: $1,000
  • At premium: above $1,000 (e.g., $1,050)
  • At discount: below $1,000 (e.g., $950)

• Why Pay More or Less?

  • “Because that bond’s interest payments might be more attractive than what newly issued bonds are offering today” (Andy Temte, 07:08)
  • If coupon is better than current rates, you'll pay a premium; if worse, you’ll pay a discount.

5. Most Important Concept: Inverse Relationship Between Rates and Prices

(08:16–10:47)

• Core Principle: “When rates rise, prices fall, and vice versa. This is the relationship every bond investor must understand.” (08:34)

• Practical Example:

  • Buy a bond at 5% coupon.
  • If rates rise to 6%, the bond’s price must fall to match market yields—calculated using present value, example price falls to ~$926.
  • If rates fall to 4%, the same bond’s price rises, as investors are willing to pay a premium for better-than-market coupon—example price rises to ~$1,082.

• Why the Price Difference?

  • “The price-yield function is nonlinear. In future lessons, we’re going to talk about bond duration and bond convexity as measures of interest rate risk.” (Andy Temte, 10:23)

6. Why Understanding This Matters

(10:48–11:46)

• Knowledge of bond mechanics is “essential for making informed investment decisions.”
• “When you hear in the news that the Fed raised interest rates, you now understand that existing bond prices fell. When the financial news discusses yields rising, you know that bond prices are falling.” (Andy Temte, 10:55)

Notable Quotes and Memorable Moments

• “At its core, a bond is remarkably simple. It's an IOU.” (01:11)
• “With a bond, you are a creditor with a legal claim to specific promised payments, regardless of how well or poorly the borrower is doing financially—unless they default entirely.” (01:40)
• “A bond with a 5% coupon pays 5% of its face value in interest each year.” (03:10)
• “This is where the phrase ‘clipping coupons’ originated.” (03:32)
• “When rates rise, prices fall, and vice versa. This is the relationship every bond investor must understand.” (08:34)
• “The price-yield function is nonlinear. In future lessons, we’re going to talk about bond duration and bond convexity as measures of interest rate risk.” (10:23)
• “When you hear in the news that the Fed raised interest rates, you now understand that existing bond prices fell... you know that bond prices are falling.” (10:55)

Timestamps for Important Segments

• 00:52 – What is a bond and the basic IOU structure
• 02:36 – The three key bond numbers: face value, coupon rate, maturity
• 04:40 – Why and how bonds pay semiannual interest
• 05:58 – Bond prices, par value, premium, discount
• 08:16 – Inverse relationship between rates and prices (with practical math)
• 10:23 – Introduction to more advanced topics: duration and convexity
• 10:48 – Why this knowledge is practical and matters for investors

Next Episode Teaser

Andy promises to tackle “What is yield?”—breaking down nominal yield, current yield, yield to maturity, and more, helping listeners compare bonds effectively.

Summary in a Nutshell:
Dr. Andy Temte masterfully explains the nuts and bolts of bonds, how they pay, how their pricing shifts with interest rates, and why understanding these mechanics is key to smart investing. The episode is packed with clear explanations, relatable analogies, and memorable historical tidbits—perfect for listeners at every stage of their financial journey.