July 24, 2008

Bonds 101, part 2 - Glossary of Bond Terms

In part #1 I discussed an overview of bonds. Now I'll explain many of the key terms used to discuss bonds.

Maturity - The date when the bond is finished.

Callable - A bond is callable if the issuer can repay it early.

Coupon - This is the interest rate that is paid on the face value of the bond.

Face value - The principal in the bond. The value that the bond is bought at originally.

Zero coupon - A bond without periodic interest payments or a 0% coupon. For this kind of bond the interest is paid at maturity. For example you might buy a bond for $50 and then get $100 in return years later at maturity.

Price - The price is the amount that the bond is currently traded for. Price is expressed as a fraction of 100 to represent a percent of the face value. So if the price is 99.1 then the bond is trading at 99.1% of the face value.

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