Here are some notes on the terms associated with bonds in detail:
- Face Value: The face value of a bond is the amount that the borrower agrees to repay the investor at the end of the loan term.
- Coupon: The coupon is the interest rate that the borrower agrees to pay the investor. The coupon is typically paid out semi-annually.
- Maturity: The maturity of a bond is the date on which the loan term ends and the borrower is obligated to repay the principal amount of the loan.
- Yield: The yield of a bond is the annualized return that an investor can expect to earn from holding the bond to maturity. The yield is calculated by dividing the annual coupon payments by the purchase price of the bond.
- Credit Rating: The credit rating of a bond is a measure of the borrower’s ability to repay the loan. Bonds with higher credit ratings are considered to be safer investments, and they typically offer lower interest rates.
- Default: A default occurs when the borrower fails to make a scheduled interest payment or to repay the principal amount of the loan at maturity.
Here are some additional things to keep in mind about the terms associated with bonds:
- The face value of a bond is typically $1,000.
- The coupon of a bond is typically expressed as a percentage of the face value.
- The maturity of a bond is typically 10 to 30 years.
- The yield of a bond can fluctuate over time, depending on the interest rates.
- The credit rating of a bond can be downgraded if the borrower’s financial condition deteriorates.
- A default can have a significant impact on the value of a bond.