Bonds

1. What Is a Bond?

A bond is a loan. You lend money to a government or corporation; in return they pay you a fixed interest rate (the coupon) every turn until the bond matures, at which point they return your original principal.

2. Sovereign Bonds

Sovereign bonds are issued by national governments to finance their budget deficit. They are the safest bonds in the game - governments cannot default.

How they are issued

New bonds are issued automatically every 12 turns (quarterly) when a country is running a deficit. The issuance amount equals one quarter of the annual deficit. If the budget is in surplus, no new bonds are issued that quarter.

What the coupon pays you

A bond issued when the prime rate is 5% pays a 5% annual coupon - that is $50 per year per $1,000 bond, paid proportionally each turn. The coupon is fixed at issuance and never changes for the life of that bond, even if the prime rate moves later.

3. Corporate Bonds

Corporate bonds are issued by player-founded corporations to raise capital. They work the same as sovereign bonds - fixed coupon, fixed maturity, tradeable on the market - but they carry default risk. A corporation that runs out of cash cannot pay its bondholders.

How the coupon is set

Corporate bond coupons are prime rate + rating-tier spread + a fixed corporate issuance premium. The tier spread depends on the corporation's credit rating at issuance; better-rated companies borrow cheaper. The extra premium applies to all new corporate issues equally (sovereign/treasury bonds do not use it).

Maturity choices

New corporate bonds must mature in 2, 5, or 7 game years (96, 240, or 336 turns). Bonds issued earlier at shorter maturities remain on the books until they mature.

4. The Price/Rate Relationship

This is the most important mechanic to understand. Bond market prices and interest rates always move in opposite directions.

Here is why: imagine you hold a bond paying $50/year (5% coupon on a $1,000 bond). The central bank then raises rates to 8%. New bonds now pay $80/year. Nobody would pay $1,000 for your bond paying $50 when they can get $80 from a new one. The price of your bond must fall until the yield is competitive.

Bond market price = C × [(1 − (1+r)^−n) / r] + (1+r)^−n × $1,000

Where:
  C = annual coupon payment (couponRate% × $1,000, divided by 48 for per-turn)
  r = current yield rate (prime for sovereign, prime + tier spread + corporate premium for corporates)
  n = years remaining to maturity (turnsRemaining / 48)

Key insight: prices and rates still move in opposite directions.
When rates rise, existing bonds lose value. When rates fall, they gain.
As maturity approaches, price always pulls back toward $1,000 (face value).

Example - sovereign bond, coupon locked at 5%, 1 year remaining:
  Prime rate rises to 8%:   price ≈ $972   (modest loss - near maturity)
  Prime rate falls to 2.5%: price ≈ $1,024  (modest gain - near maturity)

The further from maturity, the bigger the price swing for the same rate change.

5. Sovereign Credit Ratings

Sovereign bonds are guaranteed against default, but the country's credit rating still matters - it determines the interest rate at which the government borrows, which sets the coupon rate on new bonds. Higher debt relative to GDP means more expensive borrowing.

6. Corporate Credit Ratings

Corporate credit ratings are calculated from four financial components. The score updates every turn, so a corporation's rating can improve or deteriorate over time - and so can the market price of its bonds.

Scores are smoothed using a 75% new / 25% previous blend to prevent wild single-turn swings. A company cannot jump from AAA to CCC in one turn, but sustained losses will steadily drag a rating down.

7. Defaults & Recovery

A corporate bond defaults when the corporation's cash (liquid capital) goes negative after paying its coupon obligations. This is the only trigger - a company can have a bad credit rating without defaulting as long as it can still make payments.

What happens on default

• 1.The bond is immediately marked as defaulted.
• 2.The market price locks at $0.10 on the dollar - a 90% haircut. Holders who want out take a near-total loss.
• 3.The corporation's credit score is capped at the CCC floor for 96 turns. It cannot issue new bonds at good rates during this window.

CEO recovery option: refinance

Instead of dissolving, the CEO can refinance defaulted debt. Existing holders roll into a new bond at par (units preserved, full face-value claim restored), and the old defaulted paper is retired. This is a debt-for-debt swap — the corporation does not receive any new cash, because no new investors are buying the issuance. The benefit is that holders get off the $0.10 locked price and the corporation clears the default, though the new bond carries the current CCC-floored coupon so debt service gets more expensive. Refinancing is capped at 2 times per corporation lifetime — after that, dissolution is the only option for the remaining defaulted debt. Still subject to the 2× equity debt cap.

If the corporation dissolves

Bondholders have priority over shareholders in dissolution. Assets are liquidated and distributed:

8. How to Evaluate a Bond

The questions to ask before buying, in order:

• →What is the coupon relative to the current effective rate? For sovereign bonds, compare the coupon to the prime rate. For corporate bonds, compare it to prime + the rating-tier spread + 1.0 percentage-point corporate premium (e.g. at AAA: prime + 1% total spread vs. prime). If the coupon exceeds the current effective rate, the bond trades at a premium; if it's lower, it trades at a discount.
• →Where are rates headed? Rising rates = falling bond prices. Falling rates = rising bond prices. Time your entry around the rate cycle, not current yield alone.
• →For corporate bonds: what is the credit rating trend? A BBB company improving toward A will see its bond prices rise (spread narrows). A BBB company deteriorating toward BB will see prices fall. The direction matters as much as the current level.
• →What is your exit strategy? For sovereign bonds, holding to maturity guarantees you get $1,000/unit back — no default risk. For corporate bonds, maturity only pays par if the company doesn't default in the meantime; a default locks the market price at $0.10/unit and recovery depends on dissolution or refinance. Selling early means accepting whatever the market offers.
• →For corporate bonds: can the company make its payments? Check liquidity (cash on hand relative to interest obligations). A company with thin cash and a high coupon burden is a default waiting to happen.

9. Quick Tips