Unit
- Par Value: The face value of a bond, typically $1,000, which is repaid at maturity. It serves as the reference point for calculating coupon payments and determining the bond's value at issue. Investors receive the par value upon maturity unless the issuer defaults.
- Coupon Rate: The annual interest rate paid by the bond issuer, expressed as a percentage of par value. For example, a 5% coupon on a $1,000 par bond pays $50 per year, usually semiannually. Coupon rates are fixed for most traditional bonds but may be floating for certain instruments.
- Maturity Date: The date on which the bond issuer repays the principal amount to the bondholder. Maturities range from short-term (less than 1 year) to long-term (over 10 years). The maturity structure affects a bond's sensitivity to interest rate changes.
- Yield: The return an investor earns from holding a bond, considering both coupon payments and price changes. Yield is inversely related to bond price; when prices fall, yields rise. Different yield measures include current yield, yield to maturity, and yield to call.
- Credit Rating: An assessment of the issuer's ability to meet its debt obligations, provided by agencies such as Moody's and S&P. Ratings range from AAA (highest quality) to D (default). Higher-rated bonds offer lower yields due to lower perceived risk.
- Bond Indenture: The legal contract between the bond issuer and bondholders that outlines all terms, including coupon rate, maturity, covenants, and repayment sources. It also specifies protective provisions that restrict issuer actions.
- Call Provision: A feature that allows the issuer to redeem the bond before maturity at a predetermined call price. Callable bonds offer higher yields to compensate investors for reinvestment risk. When interest rates fall, issuers are more likely to call bonds.
- Zero-Coupon Bond: A bond that pays no periodic interest but is issued at a deep discount to par value. The investor's return comes solely from the price appreciation as the bond approaches maturity. These bonds are highly sensitive to interest rate changes.
- Current Yield: The annual coupon payment divided by the bond's current market price. Unlike yield to maturity, it does not account for capital gains or losses. For example, a bond with a $50 coupon trading at $950 has a current yield of 5.26%. It provides a simple measure of income return relative to price.
- Yield to Maturity (YTM): The total annualized return expected if a bond is held until maturity, assuming all coupon payments are reinvested at the same rate. YTM incorporates both coupon income and any capital gain or loss from buying at a discount or premium. It is the most comprehensive yield measure.
- Duration: A measure of a bond's sensitivity to changes in interest rates, expressed in years. Modified duration estimates the percentage change in bond price for a 1% change in yield. Longer duration bonds are more volatile. Duration helps investors manage interest rate risk in a portfolio.
Regulatory Requirement
Regulation: SEC Rule 15c2-11
Issuers of publicly traded bonds must file a registration statement with the SEC, including a prospectus that details the terms of the offering, financial condition of the issuer, and risk factors. This rule ensures transparency and protects investors by requiring full disclosure of material information before bond sales.
Quick Revision
- Par value is the face amount repaid at maturity, typically $1,000 per bond.
- Coupon rate determines periodic interest payments, usually paid semiannually.
- Maturity date defines the bond's life and influences interest rate risk.
- Yield measures total return, inversely related to market price.
- Credit ratings from agencies assess default risk and affect yields.
- Bond indenture is the legal contract detailing terms and covenants.
- Call provisions allow early redemption, increasing reinvestment risk.
- Zero-coupon bonds pay no interest but appreciate from discount to par.