Bond features

The bond indenture is the contract between the issuer (the borrower) and the bondholder (the lender), which sets forth all the obligations of the issuer. It usually specifies the interest rate, maturity date, convertibility, and other terms.

Important features of bonds are:

Face value

A bond's face value or denomination, which is stated on the front of the bond. This is usually a round figure.

Redemption date

The date on which the loan will be repaid is called the redemption date or the maturity date.

Coupon rate

The coupon rate or bond rate is the rate at which the bond pays interest on its face value at regular time intervals until the redemption date.

In the United States bond market, the usual practice is for the issuer to pay the coupon in two semiannual installments. For bonds issued in European bond markets or the Eurobond market, coupon payments are made only once per year.

Redemption value

A bond's redemption value or maturity value is the amount that the issuer promises to pay on the redemption date. In most cases the redemption value is the same as the face value: if so, the bond is redeemed at par.

Other types of bonds are:

Callable bonds

This type of bonds contains a clause allowing the issuer to pay off the loan at an earlier date than the redemption date.

They can have different redemption values, depending on whether the bond is called, or whether it matures at the original redemption date.

Zero-Coupon bonds

Some bonds do not make any periodic coupon payments. Instead the investor realizes interest as the difference between the maturity value and the purchase price.

 

Related topics

Bond pricing issues

Bond yield measures