Terminology of bond market.

  • Principal
    The principal of a bond is the amount that the issuer borrows and agrees to repay the bondholder on the maturity date. It is also called par value, face value, nominal value redemption value or maturity value.
  • Coupon
    Coupon is just another name for interest which payed by bond issuer.
  • Price
    In the secondary market, bond price is not necessary equal to it’s par value. It depends on number of factors, including market interest rates, credit quality, maturity, and supply and demand.
  • Yield
    The yield of a bond is the rate of return received from investing in the bond, and is based on the price paid for the bond and the coupon payment. Current yield is the simplest measure of the tield on a bond, which relates the annual interest payment to the current market price.
    $latex Current,yield = frac{Annual,coupon}{Price} &bg=000000&fg=33cc00&s=4$
    There are a number of problems associated with current yield as a measure of the return on a bond. It considers only the coupon income, but no other source of return. For example, it ignores any capital gain or loss realized from the difference between the price paid for a bond and the redemption value. It also ignores the time value of money principle and the interest-on-interest that can be earned by reinvesting coupon payments.
    A more meaningful measure of the return on a bond is the yield to maturity (YTM).
  • Maturity
    The maturity of a bond is simply the length of time before it expires. A bond’s years to maturity – term or tenor – can be any length of time, although debt securities with a term of less than one year are generally classified as money market instruments. Bonds are generally issued with maturities up to 10 years, although bonds with 100-year maturities have also been issued. Bonds with maturities of less than 10 years are referred to as ‘notes’ in some markets.
  • Credit quality
    Good quality credits generally trade at a lower yield and therefore at higher prices than poorer quality credits. Issues with a high quality credit rating can command a higher price/lower yield in the market. Investors expect a higher yield for the greater risk they incur when investing in bonds that may not be repaid.