Exhibit 1 brings all the basic features of a bond together and illustrates how these features determine the cash flow pattern for a plain vanilla bond. The bond is a five-year Japanese government bond (JGB) with a coupon rate of 0.4% and a par value of ¥10,000. Interest payments are made semi-annually. The bond is priced at par when it is issued and is redeemed at par.
Exhibit 1. Cash Flows for a Plain Vanilla BondThe downward-pointing arrow in Exhibit 1 represents the cash flow paid by the bond investor (received by the issuer) on the day of the bond issue—that is, ¥10,000. The upward-pointing arrows are the cash flows received by the bondholder (paid by the issuer) during the bond’s life. As interest is paid semi-annually, the coupon payment is ¥20 [(0.004 × ¥10,000) ÷ 2] every six months for five years—that is, 10 coupon payments of ¥20. The last payment is equal to ¥10,020 because it includes both the last coupon payment and the payment of the par value.
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