Understanding Core Bond Terminology
Bonds are fundamental debt instruments, and understanding their core terminology is crucial for anyone looking to analyze or invest in them. This module will break down three essential terms: Face Value, Coupon Rate, and Maturity Date. Mastering these concepts will provide a solid foundation for comprehending bond pricing, yield, and risk.
Face Value (Par Value)
Face value is the amount a bond issuer promises to repay the bondholder at maturity.
Also known as par value, this is the principal amount of the loan that the bond represents. It's typically stated in increments of $1,000.
The face value, or par value, of a bond is the nominal value or dollar value of a security stated by the issuer. For bonds, it is the amount on the bond that the issuer will repay to the bondholder at the maturity date. It is important to note that the face value is not necessarily the same as the market price of the bond. Bonds can trade at a discount (below face value), at par (equal to face value), or at a premium (above face value) depending on market interest rates and the issuer's creditworthiness.
The face value is the amount the issuer promises to repay the bondholder at maturity.
Coupon Rate
The coupon rate determines the periodic interest payments a bondholder receives. It's expressed as a percentage of the bond's face value.
The coupon rate is the annual interest rate paid on a bond, expressed as a percentage of the face value. For example, a 50 in interest per year. These payments are typically made semi-annually, meaning the bondholder would receive $25 every six months. The coupon rate is fixed for the life of the bond, regardless of market interest rate fluctuations. This fixed payment is a key characteristic that differentiates bonds from other investments.
Text-based content
Library pages focus on text content
1,000).
Maturity Date
The maturity date is the date when the bond issuer must repay the principal amount to the bondholder.
This is the final date of the bond's term. Upon reaching this date, the issuer repays the face value of the bond, and the bond ceases to exist.
The maturity date, also known as the redemption date, is the specific date on which the principal amount of a bond is due to be repaid to the bondholder. Bonds can have various maturities, ranging from short-term (less than a year) to long-term (30 years or more). The maturity date is a critical factor in determining a bond's risk and its sensitivity to interest rate changes. Longer-maturity bonds are generally more sensitive to interest rate fluctuations than shorter-maturity bonds.
Understanding these three terms—Face Value, Coupon Rate, and Maturity Date—is fundamental to grasping how bonds function and how their value is determined in the financial markets.
The issuer repays the bond's face value to the bondholder.
Putting It All Together
Imagine you buy a bond with a 1,000 to the issuer. For the next 10 years, you will receive interest payments, typically 25 every six months). When the 10-year maturity date arrives, the issuer will repay you the original $1,000 principal.
| Term | Definition | Key Function |
|---|---|---|
| Face Value | The principal amount repaid at maturity. | Represents the loan amount. |
| Coupon Rate | Annual interest rate as a percentage of face value. | Determines periodic interest payments. |
| Maturity Date | The date the principal is repaid. | Marks the end of the bond's term. |
Learning Resources
Provides a comprehensive overview of what bonds are, including their basic components and how they function in the financial markets.
A clear and concise video explaining the fundamental terms of bonds, including face value, coupon rate, and maturity date.
This article delves into the essential characteristics of bonds, offering practical insights into face value, coupon rate, and maturity.
A helpful guide from Fidelity that breaks down common bond terms, making them easier to understand for investors.
An accessible introduction to the bond market, covering essential terminology and concepts relevant to investors.
Morningstar offers a straightforward explanation of core bond features, including face value, coupon payments, and maturity.
This lecture from a corporate finance course explains how face value, coupon rate, and maturity influence bond valuation.
Vanguard provides a foundational understanding of bonds, including key terms like face value, coupon, and maturity.
A visual tutorial that clearly defines and illustrates the concepts of face value, coupon rate, and maturity date for bonds.
The Financial Industry Regulatory Authority (FINRA) offers a glossary of bond market terms, including definitions for face value, coupon rate, and maturity date.