Bonds

Bond Characteristics

Bonds have a number of different features of which you need to be well aware of. All these below mentioned factors play a role in determining the value of a bond and the extent to which it fits in your portfolio.

Face Value/Par Value

The face value (also called as the par value) is the quantity of money a holder will receive back once a bond matures. A newly issued bond generally sells at the par value.

 What makes other people more confused is that the par value isn’t the price of the bond. A bond's price wavers all through its life in reaction to a number of variables.  When a bond trades at a price higher the face value, it is thought to be selling at a premium. When a bond sells lower than face value, it is thought to be selling at a discount.

Coupon (The Interest Rate)

Coupon is the quantity of money the bondholder receives as interest payments. It is usually expressed as a percentage of the par value. It’s referred to as “coupon” because sometimes these bonds have a physical presence which one can tear off and redeem back for interest. Though, this was a more common thing in the past, these days the records are electronically managed.

If a bond pays a coupon of 10% and its par value is Rs.10,000 its interest would be Rs.1000 annually. Rates that remain stay as a fixed percentage of the par value like these are considered as Fixed-rate bond. Another possibility is flexible interest payment, referred to as floating-rate bond where interest rate is tied up to market rates through an index, for example the rate on Treasury bills.

One might presume investors will pay more for a high coupon than for a low coupon. All things being equivalent, a lower coupon suggests that price of the bond will fluctuate more.

Maturity

Maturity is the date on which the principal amount of a note, draft, acceptance bond or other debt instruments becomes due and is reimbursed back to the investor and thereafter the interest payments stops. It is also regarded as the termination date on which an installment loan must be paid in full. Maturities can range from as low as 3 years to as long as 30 years.

A bond that matures in three years is much more anticipated and therefore less risky than a bond that matures in 30 years. Thus, in general, the longer the duration to maturity, the higher the interest rate. Also, all things being comparable, a longer term bond will alter more than a shorter term bond.