Of course, nobody would loan his or her hard-earned money for nothing. The issuer of a bond must pay the investor something extra for the privilege of using his or her money. This ‘extra’ comes in the form of interest payments, which are made at a predetermined rate and schedule. The interest rate is often referred to as the coupon. The date on which the issuer has to repay the amount borrowed (known as face value) is called the maturity date. Bonds are known as securities because you know the exact amount of cash get back if you hold the you’ll security until maturity. For example, say you buy a bond with a face value of $1000 a coupon of 8% and a maturity of 10 years. This means receive a total of $80 ($1000*8%) of interest you’ll per year for the next 10 years. Actually because most bonds pay interest semi-annually you’ll receive two payments of $40 a year for 10 years. When the bond matures after a decade, you’ll get your $1000 back. Face Value / Par Value : The face value (also known as the par value or principal) is the amount of money a holder will get back once a bond matures. Newly issued bond usually sells at the par value. Corporate bonds normally have a par value of $1000 but this amount can be much greater for government bonds. What confuses many people is that the par value is not the price of the bond. A price bond’s fluctuates throughout its life in response to a number of variables (more on this later). When a bond trades at a price above the face value, it is said to be selling a premium. When a bond sells below face value it is said to be selling at a discount. Coupon (The Interest Rate) : The coupon is the amount the bondholder will receive as interest payments. called a It’s ‘coupon’ because sometimes there are physical coupons on the bond that you tear off and redeem for interest. However this was more common in the past. Nowadays records are more likely to kept electronically. As previously mentioned most bonds pay interest every six months but possible for them to it’s pay monthly, quarterly or annually. The coupon is expressed as a percentage of the par value. If a bond pays a coupon of 10% and its par value is $1000 then pay %100 of interest a year. A it’ll
Of course, nobody would loan his or her hard-earned money for nothing. The issuer of a bond must pay the investor something extra for the privilege of using his or her money. This ‘extra’ comes in the form of interest payments, which are made at a predetermined rate and schedule. The interest rate is often referred to as the coupon. The date on which the issuer has to repay the amount borrowed (known as face value) is called the maturity date. Bonds are known as securities because you know the exact amount of cash you’ll get back if you hold the security until maturity. For example, say you buy a bond with a face value of $1000 a coupon of 8% and a maturity of 10 years. This means you’ll receive a total of $80 ($1000*8%) of interest per year for the next 10 years. Actually because most bonds pay interest semi-annually you’ll receive two payments of $40 a year for 10 years. When the bond matures after a decade, you’ll get your $1000 back. Face Value / Par Value : The face value (also known as the par value or principal) is the amount of money a holder will get back once a bond matures. Newly issued bond usually sells at the par value. Corporate bonds normally have a par value of $1000 but this amount can be much greater for government bonds. What confuses many people is that the par value is not the price of the bond. A bond’s price fluctuates throughout its life in response to a number of variables (more on this later). When a bond trades at a price above the face value, it is said to be selling a premium. When a bond sells below face value it is said to be selling at a discount. Coupon (The Interest Rate) : The coupon is the amount the bondholder will receive as interest payments. It’s called a ‘coupon’ because sometimes there are physical coupons on the bond that you tear off and redeem for interest. However this was more common in the past. Nowadays records are more likely to kept electronically. As previously mentioned most bonds pay interest every six months but it’s possible for them to pay monthly, quarterly or annually. The coupon is expressed as a percentage of the par value. If a bond pays a coupon of 10% and its par value is $1000 then it’ll pay %100 of interest a year. A
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