Key Terms
Par value (face value)
The principal amount repaid at maturity. Standard for corporate bonds is $1,000.
Coupon rate
Annual interest rate printed on the bond. Used ONLY to calculate coupon payment amount.
Coupon payment
Par value multiplied by coupon rate. If annual: $1,000 x 5% = $50.
Maturity date
When the bond expires. Issuer makes the final coupon payment and repays par value.
Yield to maturity (YTM)
The discount rate used to bring future cash flows to present value. Reflects the actual return the investor earns if hel
T-bills
Short-term (under 1 year). Safest.
Treasury notes
Maturities from 1 to 10 years.
Treasury bonds
Maturities from 10 to 30 years.
Savings bonds
Purchased by individuals; backed by US government; low return.
Zero-coupon bonds
No periodic coupon payments. Issued at deep discount from par.
Convertible bonds
Can be converted into a predetermined number of common stock shares at the bondholder's discretion during specified peri
Junk bonds (high-yield bonds)
Rated below investment grade (below BBB/Baa). High risk, high potential return.
When interest rates rise
Existing bond prices fall. When interest rates fall: existing bond prices rise.
When coupon rate is GREATER than YTM
Bond sells at a PREMIUM (above par). When coupon rate is LESS than YTM: bond sells at a DISCOUNT (below par).
Normal (upward slope)
Long-term rates higher than short-term rates. Typical during economic expansion.