There are certain terms associated with bonds you must understand before investing. There are six basic ones that we will cover in this article to help you get started. This is by no means everything that you need to know about bonds, but this will give you a basic education. Please learn more if you need to before investing.
The first is face value of the bond. Face value is the bond holder loans to the issuer by purchasing a bond from them. The name comes from the literal meaning of how much the bond is worth that is printed on the front of it.
The next is principal. Principal and face value are generally the same meaning, but can be different. The principal is the money represented by the bond. This is very simple and is not meant to be confusing. If the bond has a face value of $15,000, then the principal amount is $15,000.
Interest rate is the rate of interest that bond pays for the time that it is issued. This is determined when the bond is issued. For companies that have lower credit ratings, this number would usually be higher. A higher credit rating would result in a lower interest rate. The length of the loan can determine the interest rate. The longer a loan, usually the higher the interest rate.
Coupon Payments is just referring to the interest payment made by the bond. Usually at the bottom of bonds, there are little coupons that you can clip out in order to submit them to the issuer. This will help the buyer get paid at the right time. They are growing more and more less common in today’s electronic world, but still exist for a few people that use them.
Maturity is the amount of time that the bond is issued for. This is when the bond expires and the issuer is required to pay face value to the investor.
Yield is the total percentage of return of money the investor gets from the bond. This can represent a gain or loss on the investors part. The investor could have bought the bond for less or more than face value of the bond. It all depends on what has transpired between investors. There are many different reasons for this happening.