The basic features of a bond (maturity coupon rate and par value)

by Mila Markovich.
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A fixed income securityis a financial obligation of an entity (the issuer) who promises to pay aspecified sum of money at specified future date. The promises of the issuer andthe rights of the bondholders are set forth in the indenture.

The par value (principal, face value, redemption value, or maturity value) is theamount that the issuer agrees to repay the bondholder by the maturity date.

  • Bonds can have any par value, though a par value of $1,000 is the most common.
  • The price of a bond is typically quoted as a percentage of its par value. For example, a value of 90 means 90% of the par value.
  • A bond may trade above (trading at a premium) or below (trading at a discount) its par value.

Maturity is the time period between today's date and the date on which thebond ceases to exist. It defines the remaining life of the bond.

  • It defines the time period over which the bondholder can expect to receive interest payments and principal repayment.
  • It affects the yield on a bond.
  • It affects the price volatility of the bond resulting from changes in interest rates: the longer the maturity, the greater the price volatility.

Bonds fall into four categories based on their maturity:

  • Money market instruments: 1 year or less.
  • Short-term notes: 1 to 5 years.
  • Intermediate-term bonds: 5 to 12 years.
  • Long-term bonds: More than 12 years.

The interest rate that the issuer agrees to pay each year is called coupon rate. The coupon is the annualamount of the interest payment and is found by: par value x coupon rate.

  • The coupon has nothing to do with the bond price.
  • In the US most issuers pay the coupon semiannually.
  • If you have a "6.5 of 12/1/2009 trading at 97", this means you have a bond that has a 6.5 coupon rate, matures at 12/1/2009 and is selling for 97% of its par value.

The payments that the issuer makes to the bondholder can be in anycurrency. An issue in which payments to bondholders are in US dollars is calleda dollar-denominated issue. A nondollar-denominated issue is one inwhich payments are not denominated in US dollars. If an issue has couponpayments in one currency and principal payments in another currency, it iscalled dual-currency issue.

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