The Theory and Practice of Investment Management: Asset Allocation, Valuation, Portfolio Construction, and Strategies, Second Edition

GENERAL FEATURES OF BONDS

We begin our introduction to fixed-income securities or bonds with a description of features common to all of them.

Term to Maturity

The term to maturity of a bond is the number of years over which the issuer has promised to meet the conditions of the obligation. At the maturity date the issuer will pay off any amount the bonds outstanding. The convention is to refer to the “term to maturity” as simply its “maturity” or “term.” As we explain later, there may be provisions that allow either the issuer or holder of the debt instrument to alter the term to maturity.

Par Value

The par value of a bond is the amount that the issuer agrees to repay the bondholder by the maturity date. This amount is also referred to as the principal, face value, redemption value, or maturity value. Bonds can have any par value.

Because bonds can have a different par value, the practice is to quote the price of a bond as a percentage of its par value. A value of 100 means 100% of par value. So, for example, if a bond has a par value of $1,000 and is selling for $900, it would be said to be selling at 90. If a bond with a par value of $5,000 is selling for $5,500, the bond is said to be selling for 110. The reason why a bond sells above or below its par value is explained in Chapter 17.

Coupon Rate

The coupon rate, also called the nominal rate or the contract rate, is the interest rate that the issuer/borrower agrees to pay each year. The dollar amount of the payment, ...