What does a bond's cash-flow timeline actually look like?

Every valuation idea in this course rests on one picture: a row of small payments and then one large one. Draw that picture properly now, and the price-yield seesaw in the next unit becomes arithmetic instead of magic.

Draw the timeline

Take a $1,000 bond, 4% coupon, semi-annual, 5 years to maturity.

• Every six months: $20 (4% of $1,000 = $40 a year, halved)
• Ten times in total over five years
• At the final date: the last $20 coupon plus $1,000 of principal = $1,020

Sketched, it looks like a comb with one very tall tooth at the end:

20 · 20 · 20 · 20 · 20 · 20 · 20 · 20 · 20 · 1,020

Total cash returned: $200 in coupons + $1,000 principal = $1,200.

That shape — small, small, small, huge — is the single most important visual in fixed income. Notice how much of the total sits in that last payment: $1,000 of $1,200, 83% of the money, on one day, years away. Everything about how bonds behave flows from that lopsidedness.

Where the money actually is

On this bond the principal dominates, so its value is mostly the value of one distant payment, and the value of a distant payment is extremely sensitive to the rate you discount it at.

Notice that the share is a property of the maturity, not of bonds. Stretch the same 4% coupon out to thirty years and the coupons total $1,200 against $1,000 of principal — the principal is now a minority of the cash, 45% of it. So if a longer bond swung harder because its principal loomed larger, the thirty-year would swing less than this one. It swings more.

What actually lengthens is the DISTANCE. Every payment on the thirty-year sits further out, each discounted by a higher power of the rate, and it is that — not the size of any one payment — that makes the long bond the more violent animal. Unit 2 gives the quantity a name and a formula. We are not doing that arithmetic yet, but you can already feel the mechanism: push a big payment further away, and its present value becomes more fragile.

Compare two bonds with the same $1,000 face and 4% coupon:

• 2-year: $80 of coupons, then $1,000. The big payment is close.
• 30-year: $1,200 of coupons, then $1,000. The big payment is a generation away — and you are locked into $40 a year for thirty years no matter what the world does in between.

Same issuer, same coupon, completely different animals.

The zero-coupon special case

Some bonds skip the comb entirely. A zero-coupon bond pays no interest at all — just the face value at maturity. Your return comes from buying it below par.

Example: a 1-year zero with $1,000 face bought for $960. You receive $1,000 in a year. The gain is $40, so the return is 40 ÷ 960 = 4.17%. No coupons were ever paid; the discount was the interest.

Short-term government paper — Treasury bills and their equivalents worldwide — works exactly this way. Buy at a discount, get face value back. It is the cleanest possible version of a bond, and it makes the discounting logic of the next unit obvious: price today and value at maturity are connected by a rate.

Total return, honestly stated

Add up the $1,200 from our 5-year example and it is tempting to say "$200 profit on $1,000, done." Two honest caveats:

• You probably didn't pay $1,000. You paid the market price, which is rarely exactly par.
• Timing matters. $20 received in six months is worth more than $20 received in five years, because the earlier $20 can be put to work sooner. Summing raw cash ignores this. The proper measure — yield to maturity — handles it, and Unit 2 builds it.

In the data

A bond fund passes its coupons on as monthly distributions, and in a price history they show up not as dated payments but as a gap between two prices. The table is a fund holding long US Treasuries: on 6 March 2020 it closed at $166.77, while the same day's price adjusted for every distribution paid since is near $137.

The gap is the timeline's coupons, folded back into the history. It is driven by the distributions but not equal to their sum, because the adjustment scales each past price rather than subtracting cash. Compare a closing price from 2020 with one from today and you silently discard six years of coupons.

Try it now

1. Draw the timeline for a $1,000 bond, 6% coupon, semi-annual, 3 years. How many payments, of what size, and what lands on the final date? (Six payments of $30; the last date pays $30 + $1,000 = $1,030.)
2. Total the cash: $180 in coupons plus $1,000 principal = $1,180. Now say why that total is not the same as your return.
3. US Treasury bills run from four weeks to fifty-two; the table below is the shortest one on the newest date. That row is the zero-coupon logic above, running live: a price below face today, face value on the repayment date, nothing in between. A bill is quoted as a discount off face, not as a yield. Count the days from the date to the repayment date and turn the discount quote into a price per 100 of face: 100 × (1 − discount ÷ 100 × days ÷ 360). The gap between that price and 100 is the bill's entire interest.