Anyone who wants to invest needs to learn to walk before they run, and this is especially true when it comes to bonds.
The term maturity refers to when the bond matures and the person who holds the bond receives the final payment of the principal as well as the interest.
There are three different types of maturity:
- Short-Term maturity will be between 1 and 5 years.
- Intermediate-Term maturity is from 5 to 12 years.
- Long-Term maturity is for those bonds that are more than 12 years before maturing.
The maturity is always important to know when investing in a bond. It will determine the amount of time that you will receive interest, and it will determine when you will receive the principal payments.
Longer maturities will have higher yield rates than the short-term maturities, so this should also be a factor to consider when choosing bonds.
In addition, keep in mind that long-term maturity bonds tend to be more volatile.
Par value is the term used for the amount of money the bondholder receives when the bond reaches maturity. The amount can vary, but the typical amount is $1,000.
You may hear other terms being used in the place of par value, such as principle or face, but they are one and the same.
When looking at bond prices, they are often quoted as “percentage of par”, which would be a portion of the par value.
The coupon rate is a bond feature that will let you know the interest rate that the bond will pay those who hold it over the course of the year.
When you take the coupon rate and multiply it by the par value, you will be able to find your coupon dollar value.
The coupon rate has the potential to affect the bond’s price. Keep in mind that the rate is only good for one year, and the payments that you receive will arrive throughout the year.
In some cases, you may receive monthly payments, and with other options, such as international securities, you may receive only one payment per year.
This will let you know what type of currency your interest and principle will be paid to you.
Two different types of currency denomination are possible, and they are very simple to understand.
Dollar denominated means that the bond will have a payment made in US dollars.
Non-dollar denominated refers to payments that are made in a currency other than US dollars.
The current Ask is the lowest price at which a dealer will be ready to sell, and the current Bid is the highest price as which a dealer will be ready to buy.
The price spread is the difference between the Bid and Ask price.
Dealers who are selling bonds will generally mark up the Ask price. When they are buying bonds during a principal transaction, they will mark down from the Bid price.
The term closing price refers to the final price at which a security will trade for the day.
On the market, you will find that bonds are generally priced at 1/10 of their par value. Let’s say that a bond has a value of $1,056, and it is traded at $105.60. These bonds are traded at a premium.
A bond that has a value of $986 and is traded at $98.60 is traded at a discount. If the bond has a par value of $1,000, it is traded at a price of $100.
A call option will allow the issuer to redeem their bonds and pay off the principal before the bond reaches maturity if they choose.
These are some of the most important bond features and terms that investors should learn when they are thinking of investing.