Terms used in bonds can be best explained by an example. The image shows a bond issued by a hypothetical XYZ company. Following terminologies are explained namely;
- Serial number
- Issue date
- Par value / Face value
- Maturity period
- Coupon rate / Interest rate
- Common seal of the company
- Serial Number: Companies issue bonds in denominations e.g. $100, $1000. Because of these denominations Companies has to issue a series of bonds to ensure that required amount of debt is collected. Thus serial numbers are used to avoid duplication of bonds.
- Issue date: denotes the date when bonds are actually issued by the company. This date is important as it helps to calculate the reaming maturity period of the bonds.
For example a bond is issued on 1 january 2003 which will mature in 5 years. If an investor purchases this bond on 1 January 2005, he can calculate the remaining time of maturity from actual date of issue which is 3 years.
- Issuer: the bond is issued by the XYZ Company which is responsible to pay the interest as well as principal amount on bond. In case of default, XYZ Company can be sued.
- Investor: This represents the holder or investor of the bond. The name tells the owner of the bond. Owner is legally entitled to receive principal and interest and sue the issuer in case of default in payments.
- Par value / Face value: Face value of the bond is actual principal amount which will be paid at maturity by the issuer. Face value is clearly engraved on the bonds. In our example one pound is clearly mentioned on the bond which will be paid at maturity. Investors may purchase bond on face value or lower or above the face value depending upon the value of the bond in the market at the time of purchase. Normally bonds available in financial markets have face value of $100 or $1000.
- Maturity period: maturity period is the length of time after which the holder of bond (investor) will receive the face value of bond and the bond is terminated or purchased back by the issuer. Bonds clearly mention the maturity period. In our example this is one year. In other words holder of the bond will hold this bond for one year and then claims for 1 pound being the face value of the bond.
- Coupon rate / interest rate: this rate represents the payment of interest (based on percentage of Par value of the bond) on regular intervals over the maturity life of the bond.
- Common seal of the company: This is the requirement of law which bounds the issuer to make payments as he promised. Otherwise he can be sued.
Example: If a bond with face value of $100 will mature in 10 years and its coupon rate is 5% annual then the investor will receive 5% of face value i.e. 5% * 100 = $5 annually for 10 years. At the end of 10th year he will receive $5 as interest payment and $ 100 as principal.