Nominal, principal, par, or face amount is the amount on which the issuer pays interest, and which, most commonly,
has to be repaid at the end of the term. Some structured bonds can have a redemption amount which is different from
the face amount and can be linked to performance of particular assets.
The issuer has to repay the nominal amount on the maturity date. As long as all due payments have been made, the issuer
has no further obligations to the bond holders after the maturity date. The length of time until the maturity date is often
referred to as the term or tenor or maturity of a bond. The maturity can be any length of time, although debt securities
with a term of less than one year are generally designated money market instruments rather than bonds. Most bonds have a
term of up to 30 years. Some bonds have been issued with terms of 50 years or more, and historically there have been some
issues with no maturity date (irredeemable). In the market for United States Treasury securities, there are three categories
of bond maturities:
Short term (bills):
Maturities between one to five year; (instruments with maturities less than one year are called Money Market Instruments)
Medium term (notes):
Maturities between six to twelve years;
Long term (bonds):
Maturities greater than twelve years.
The coupon is the interest rate that the issuer pays to the holder. Usually this rate is fixed throughout the life
of the bond. It can also vary with a money market index, such as LIBOR, or it can be even more exotic. The name
"coupon" arose because in the past, paper bond certificates were issued which had coupons attached to them, one for
each interest payment. On the due dates the bondholder would hand in the coupon to a bank in exchange for the
interest payment. Interest can be paid at different frequencies: generally semi-annual, i.e. every 6 months, or annual.
The yield is the rate of return received from investing in the bond. It usually refers either to the current yield,
or running yield, which is simply the annual interest payment divided by the current market price of the bond
(often the clean price), or to the yield to maturity or redemption yield, which is a more useful measure of the return
of the bond, taking into account the current market price, and the amount and timing of all remaining coupon payments
and of the repayment due on maturity. It is equivalent to the internal rate of return of a bond.
The quality of the issue refers to the probability that the bondholders will receive the amounts promised at the due dates.
This will depend on a wide range of factors. High-yield bonds are bonds that are rated below investment grade by the
credit rating agencies. As these bonds are riskier than investment grade bonds, investors expect to earn a higher yield.
These bonds are also called junk bonds.
The market price of a tradable bond will be influenced amongst other things by the amounts, currency and timing of the
interest payments and capital repayment due, the quality of the bond, and the available redemption yield of other comparable
bonds which can be traded in the markets.
The price can be quoted as clean or dirty. ("Dirty" includes the present value of all future cash flows including accrued
interest. "Dirty" is most often used in Europe. "Clean" does not include accrued interest. "Clean" is most often used in the U.S. )
The price at which investors buy the bonds when they are first issued will typically be approximately equal to the nominal amount.
The net proceeds that the issuer receives are thus the issue price, less issuance fees. The market price of the bond will vary over
its life: it may trade at a premium (above par, usually because market interest rates have fallen since issue), or at a discount
(price below par, if market rates have risen or there is a high probability of default on the bond).