Lesson 1 of 8
What a bond is
A bond is a dated promise with a rank. Reading one means reading three things: the cash flows, the maturity schedule and the place in the queue.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- A bond is a fixed schedule of dated payments plus a principal repayment, and nothing about it is discretionary.
- The maturity schedule is the fact an equity investor needs most, because it says when the company has to find cash.
- Rank decides what happens if the cash is not found, and rank is a property of the document rather than of the company.
A share is a residual claim with no promised payment. A bond is the opposite: a promise, with dates on it, that ranks ahead of the share. Everything in this course follows from that one difference.
One company's long-term debt, by year to maturity
- Year 1$0m
- Year 2$0m
- Year 3$900m
- Year 4$500m
- Year 5$500m
- After year 5$600m
The three parts
The coupon. A stated percentage of the face amount, paid on fixed dates, usually twice a year in the US market. A 5 percent coupon on 1,000 of face pays 50 a year, whatever the bond's price does.
The principal. The face amount, repaid in full on the maturity date. This is the payment that causes trouble, because it arrives all at once.
The rank. Where this claim sits against the company's other claims. Secured before unsecured, unsecured before subordinated, all of them before the shareholders. Rank is written in the indenture, not implied by size.
Reading a maturity schedule
The figure above is a real one. That company had 2,500 million of face value outstanding at 30 June 2025, and none of it due in the next two years. Then 900 million falls due in year three.
Nothing due soon is comfortable. A cliff in year three is a date on which the company must either have the cash, refinance at whatever rate the market offers then, or negotiate. Which of those happens is not knowable in advance, and the date is. That is why the schedule is worth reading before any ratio.
Why an equity investor reads this at all
Three reasons, all of them about the shares. The schedule says when a refinancing decision is forced. The rank says how much of the business a shareholder still owns if it goes wrong. And the coupon against today's market rate says whether the next refinancing raises the interest bill or lowers it.
None of that is a forecast. All of it is on a page of the 10-K, in a table, with dates.
Check yourself
A bond's coupon is 5 percent and its market price has fallen. What happens to the cash the holder receives each year?
- It falls with the price
- It does not change
- It rises to compensate
Show the answer
Answer: B.
The coupon is a fixed percentage of face value, not of price. Only the yield, which relates that fixed cash to the price paid, moves.Which fact in a debt note most directly tells an equity investor when a financing decision is forced?
- The weighted average interest rate
- The maturity schedule
- The interest expense for the year
Show the answer
Answer: B.
The schedule gives the dates on which principal must be repaid or refinanced. The rate and the expense describe the current cost, not the timing of the next decision.Where does a bondholder's claim rank against a shareholder's?
- Behind it
- Ahead of it
- Equal to it
Show the answer
Answer: B.
Equity is the residual claim. Every debt claim, in its own order of seniority, is satisfied before anything reaches shareholders.Sources
- The Clorox Company, annual report on Form 10-K for the fiscal year ended 30 June 2025, accession 0000021076-25-000039, filed 8 August 2025. Maturity schedule, long-term debt carrying amount, weighted average interest rate and interest expense as filed in XBRL.
- Damodaran, Investment Valuation: the treatment of debt claims and their priority in valuing equity.
What this leaves out
- One company's schedule is used because it is real and traceable. It is an illustration of how to read a note, not a comment on that company.
- The maturity buckets in a US debt note are stated relative to the balance sheet date, so year three means the third year after 30 June 2025 and not a calendar year.
- Revolving facilities, commercial paper and lease obligations sit outside this table and have to be read separately.
- Nothing here is advice about any security.