• Basic Features of Bonds

    Maturity date

    Maturity date specifies the date when the bond will be matured and the issuer will pay back the par value of the bond to the subscriber with final coupon payment if any. The maturity date or the tenure is always decided at the beginning when all the terms are defined. For short term government bonds the maturity date can be as low as 14 days (for 14-days treasury bills) and long term bonds the maturity can be as long as 30 years . Longer maturity date increases the liquidity risks involved in the bond investment. The tenure is mainly denoted in years.

    Par Value

    Par value is the base amount for each bond which the issuer promises to pay to the subscriber at the time of the maturity. Par value is also specified as face value or maturity value. Coupon payments are calculated based on the par value of the bond.

    Coupon Payment

    Coupon payment is the interest payment that the bond issuer pays to the bond holders at period intervals. Usually this rate is fixed throughout the tenure of the fixed coupon payment bonds, the coupon rate can be variable and based on LIBOR or other standard rates for floating rate bonds.

    Coupon is paid either annually or semi-annually and the payment date is always fixed at the time of issuing the bonds. Even if coupon is paid semi-annually, the coupon rate is always specified as the annual interest rate on the par value of the bond.

    The bonds without any coupon payments are called zero-coupon bonds. Zero coupon treasury bills do not pay any coupon during the whole tenure.

    If one bond is issued with par value of 1000 USD and coupon payment of 10% annually for next 5 years then the payment will be as below

    • First coupon payment of 100USD at the end of first year.
    • Coupon payments of 100 USD at the end of second, third, fourth and fifth year.
    • Par value 1000 USD will be paid at the time of maturity or at end of fifth year. So the total payment at the end of fifth year will be 1100 USD.
    • Number of times the coupon will be paid is 5.

    If the coupon payment is paid semi-annually then

    • All the semi-annual coupon payments will be 50 USD. First coupon payment will be paid after 6 months.
    • After that 50 USD coupon payment will be paid after each 6 months.
    • At the end of fifth year, par value 1000 USD will be paid with 50 USD last coupon payment. So the total payment at the end of fifth year will be 1050 USD.
    • Number of times the coupon will be paid is 10.

    Issue Price

    Issue price is the price at which the bond issuer sells the bonds to the bond buyers. This price depends on the par value, coupon payment, interest rate and tenure of the bond and almost equal to the par value for most of the cases.

    Market Price

    Market price is the current market price of a bond which is tradable in the market. It is calculated based on the current maturity date, interest rate, coupon payment and par value. In other way, market value is the present value of all expected future coupon and principal payments of the bond discounted at the bond’s current yield rate or rate of return. Higher interest rate reduces the market value of bond as it increases the discount factor.

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