Bond trading involves special terminology and strategy. Here’s a quick overview of the most common terms used by investors.
The face (par) value of your bond is the amount the issuer pays you, when your bond reaches maturity. Face value is not necessarily what you paid for the bond, which is known as the principal. You may see these terms used interchangeably, but they are not the same.
Some bonds trade for a premium that is more than face value, while others trade for less at a discount. Bond value fluctuates throughout its lifespan, depending on factors like market conditions, prevailing interest rates, and the issuer’s credit rating.
The amount of interest paid on a bond is called the coupon. Originally, bonds featured actual coupons that you would tear off and redeem to receive your interest payments. Modern coupon payments are electronic.
Bonds with shorter lifespans have lower risk and pay lower interest rates than long-term bonds. Long-term bonds pay higher interest to compensate the buyer for fluctuations in the market; changes in prevailing interest rates; and risks associated with the issuer’s ability to pay the coupon or repay the bond’s face value at maturity.
Bond maturity date
A bond’s maturity date refers to the day when the issuer promises to pay you the full face value of your bond. Maturity dates typically range from one to 30 years from the date of issue. When you buy a bond, you’re not stuck with it until the maturity date. Like most securities, bonds can be bought or sold on the open market at any time during their life span. Bonds with longer maturities are more sensitive to changes in interest rates.