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Key Characteristics of Bonds

Key Characteristics of Bonds

Author: Sophia Media

Recognize key terms associated with bonds.

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This is Dr. Bob Nolley, back with our next lesson on some key characteristics of bonds. One term that we hear regarding bonds is the par value, which is the face value. This is the amount of money that the bond holder will be paid at the date of maturity. It's usually $1,000. But it can be higher.

The coupon rate is the amount of interest the bond holder will receive per payment. It is expressed as a percentage of the par value. Most often it's fixed for the life of the bond. It never changes. Coupon payments can be paid at any period, but the most common payment is semi-annually.

The coupon got its name from the fact that in the past, certificates and paper were issued that had coupons attached to them that the bond holder had to actually cut and clip and deposit in order to receive the interest payment. Today, coupon payments are made in an automated manner without paper.

The maturity date is the date in which the bond will be redeemed. It's the payment date for the loan. It's the date when the principal and any remaining interest is to be repaid to the bond holder. Most often, the maturity date is fixed, and the term is 30 years. But some bonds have longer maturities.

Treasury securities of the federal government have their own terms. Short-term bills have maturities between 1 and 5 years. Medium-term maturities called notes have maturities between six and 12 years. And long-term bonds have a maturity that's greater than 12 years.

The indenture for a bond issuance could also have provisions for callability. A call provision allows the issuer to redeem the bond at some point in time before the maturity date. This date is called the call date. And the call date is the date on which callable bonds can be redeemed early.

There could also be provisions in an indenture for the payment to a sinking fund. A sinking fund is a way for an issuer to set aside money to retire the bond. It requires funds to be set aside periodically. And for bond holders, this reduces the risk that the issue will default when paying the face value at maturity.

Now let's review some key points. The par value of the bond is the face value, and the amount the bond holder will receive at maturity. This is usually $1,000. The coupon rate is the amount of interest that a bond holder will receive, expressed as a percentage of the face value. These interest payments are most often made semi-annually.

And the maturity date is the date in which the bond will be redeemed. Maturity is usually 30 years. And it's a fixed date that is not changed.

There are two provisions that may be found in a bond indenture. One is the call provision that allows an issuer to redeem the bond prior to maturity. The other is a sinking fund, which is a provision that calls for the issuer to set aside payments periodically that will be used to retire the principal at maturity.

This is Dr. Bob Nolley. And I'll see you in the next lesson.

Terms to Know
Callable Bond

A bond that allows the issuer of the bond to retain the privilege of redeeming the bond at some point before the bond reaches its date of maturity.

Coupon Rate

Amount of interest that the bondholder will receive per payment, expressed as a percentage of the par value.

Maturity Date

The final payment date of a loan or other financial instrument.

Par Value

The amount of money a holder will get back once a bond matures.

Sinking Fund

A method by which an organization sets aside money to retire debts.