Bond basics: par value, coupon, maturity, and why price and interest rates move in opposite directions

Four separate bond terms

A bond is a debt obligation: the issuer borrows, and the holder is a creditor. For a conventional fixed-rate bond, keep par value, coupon, maturity, and market price separate.

Par value, or face value, is the principal scheduled for repayment at maturity. Use $1,000 par for these examples. Market price is the amount a buyer pays today, which may differ from par.

Coupon rate determines annual interest on par, not on market price. A 6% coupon on $1,000 par pays $60 annually. If paid semiannually, each payment is $30. A purchase at $900 does not change annual interest to $54.

Maturity is the scheduled principal repayment date. A conventional bond held to maturity repays its $1,000 face amount regardless of whether the holder paid a premium or discount. Payment depends on the issuer's ability to pay, and a callable bond may be repaid before maturity.

Reading the price

Bond quotations are percentages of par. For a $1,000-par bond:

• 95 means $950: a discount.
• 100 means $1,000: par.
• 105 means $1,050: a premium.

These quoted prices exclude accrued interest and transaction charges. A premium or discount changes the purchase price, not the bond's face amount or fixed coupon.

Why rates and prices move oppositely

Hold credit quality and other factors constant. When comparable market interest rates rise, newly issued bonds offer more interest relative to their prices. An existing bond's fixed payments become less attractive, so its price falls to provide a competitive return. When comparable rates fall, the existing fixed payments become more attractive, so its price rises.

The market price adjusts; the fixed coupon does not. Identify which number the question gives before calculating: par determines coupon dollars; a percentage quotation determines price; changing market rates affect the existing bond's price in the opposite direction.