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Bonds
Basic Bonds Terminology
by InvestorGuide Staff (Write for us!)
(Click on a link within the article to get a definition of that word)
While you can probably pick up a lot about how the stock marketworks simply
from following the news, the same cannot be said for the bond market. Because it is considered less exciting, the bondmarket doesn't get a lot of coverage. But it is essential that you understand the basics. Here are some of the most important bond-related terms.
Maturity is the length of time before the principal is returned on a bond. It is also called term-to-maturity. At the time of maturity, the issuer is no longer obligated to make interest payments. Maturitiesrange significantly, from 1 month for some municipal notes to 40+ years for some corporate bonds. When evaluating your goals, keep in mind that bonds of different maturities will behave somewhat differently. For example, bonds with long-term maturities will be more sensitive to changes in interest rates. Shorter term bonds are more stable and, because you are more likely to hold it to maturity, are more predictable. There are some circumstances where a bond will be "called" before maturity .
Coupon
The couponrate is the interest rate that is paid out to the bond holder. The name derives from the old system of payment, in which bond holders would need to
send in coupons in order to receive payment. The coupon is set when the bond is issued and is usually expressed as an annualpercentage of the par value of the bond. Payments usually occur every six months, but this can vary. If there is a 5% coupon on a $1000 face value bond, the bondholder will receive $50 every year. If two bonds with equal maturities and face valuespay out different coupons, the prices of these bonds will behave differently in the secondary market. For example, the bond with a lower coupon rate will be less expensive because the bondholder is going to be getting more of his/her return from the return of principal at maturity than will the holder of a bond with a higher coupon. There are some bonds that do not pay out any coupons; these are called zero-coupon bonds .
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