Bond Basics: Issue Size & Date, Maturity Value, Coupon
Investors often add bonds to their investment portfolio to provide an element of stability, as bonds are known to be safe, conservative investments. When you invest in bonds, you're providing a steady stream of income in times when your stocks may perform poorly, and bonds are a great way to protect your savings when you don't want to expose your money, such as retirement funds, at risk.
Five Key Bond Features
Most individual bonds have five features when they are issued: issue size, issue date, maturity date, maturity value, and coupon. Once bonds are issued, yield to maturity becomes the most important figure for determining the actual yield an investor will receive.
Issue size: The issue size of a bond offering is the number of bonds issued multiplied by the face value. For example, if an entity issues two million bonds with a $100 face price, the issue size is $200 million dollars. The issue size reflects both the borrowing needs of the entity issuing the bonds, as well as the market’s demand for the bond at a yield that’s acceptable to the issuer.
Issue date: The issue date is simply the date on which a bond is issued and begins to accrue interest.
Maturity date: The maturity date is the date on which an investor can expect to have his or her principal repaid. It is possible to buy and sell a bond in the open market prior to its maturity date.
Maturity value: the amount of money the issuer will pay the holder of a bond at the maturity date. This can also be referred to as “par value” or “face value.”
Since bonds trade on the open market from their date of issuance until their maturity, their market value will typically be different than their maturity value. However, barring a default, investors can expect to receive the maturity value at the specified maturity date, even if the market value of the bond fluctuates during the course of its life.
Coupon: The coupon rate is the periodic interest payment that the issuer makes during the life of the bond. For instance, if a bond with a $10,000 maturity value offers a coupon of 5 percent, the investor can expect to receive $500 each year until the bond matures. The term “coupon” comes from the days when investors would hold physical bond certificates with actual coupons that they would cut off and present for payment.
Yield to Maturity: Since bonds trade on the open market, the actual yield an investor receives if they purchase a bond after its issue date (the “yield to maturity”) is different than the coupon rate.
Example of a Bond's Yield
Starting with the dollar amounts from the example above, suppose that a company issues 10-year bonds with a face value of $10,000 each and a coupon of 5 percent. In the two years following the issuance, the company experiences rising earnings, which adds cash to its balance sheet and provides it with a stronger financial position. All else equal, its bonds would rise in price, say to $10,500, and the yield would fall (since prices and yields move in opposite directions).
While the coupon would remain at 5 percent, meaning that investors would receive the same payment each year ($500), an investor who purchased the bond after it had already risen in price would receive a lower yield to maturity. In this case: a $500 coupon divided by the $10,500 face value, for a yield to maturity of 4.76 percent. In this way, a bond’s coupon and its actual yield are not necessarily the same. Yield to maturity, and not the coupon, is the yield an investor will actually receive after they buy a bond.
Learn more about bond basics.