Understanding bond terminology:
- Fixed interest payments: A specified rate of interest paid by the issuer that does not change over the life of the bond.
- Face value: A bond’s face value (sometimes referred to as “par”). This is the amount the issuer originally borrowed and is obligated to pay back when the bond matures. The face value never changes. For most bonds, it is $1,000.
- Coupon: Another term for the interest rate paid by the bond. Annual payments are determined by multiplying the face value by the interest rate. The interest rate is fixed for the life of the bond and never changes, even if interest rates in the general economy fluctuate. Most bonds pay interest twice a year (semi-annually).
- Maturity date: The date when the issuer promises to pay back the face value of the bond. Most bonds have a stated maturity, which is the date when the issuer must repay the face value amount. Maturity periods range from a few weeks to 30 years. For some bonds, the issuer reserves the option to pay off the bond before the maturity date. These are referred to as “callable” bonds.