Issuer – A key feature of a bond is the nature of the issuer. Different issuers have different ability to satisfy their contractual obligations to lenders. There are mainly three issuers of bonds:
• Government and its agencies
• Municipal Bodies
• Corporations (Domestic and Foreign)
Face Value – Face value is the amount of money that the issuer pays the holder of the bond when the bond matures. A newly issued bond usually sells at the face value. When a bond trades at a price above the face value, it is said to be selling at a premium and when a bond sells below face value, it is said to be selling at a discount. If a bond trades at the face value, it is said to be trading at par.
Term to Maturity – The term to maturity of a bond is the number of years over which the issuer has promised to meet the conditions of the obligation. The maturity of a bond refers to the date that the debt will cease to exist, at which time the issuer will redeem the bond by paying the outstanding principal. The term to maturity is often simply called ‘maturity’ or ‘term’.
Bonds with a maturity of between 1 to 5 years are considered ‘short-term’. Bonds with a maturity between 5 to 12 years are called ‘intermediate’ and ‘long-term’ bonds are those with a maturity of more than 12 years.
Coupon Rate – Also called the nominal rate, it is the interest rate that the issuer agrees to pay each year. The annual amount of the interest payment made to owners during the term of the bond is called the coupon. The coupon rate multiplied by the principal of the bond provides the dollar amount of the coupon. For example, a bond with an 8% coupon rate and a face value of $1000 will pay a coupon of $80. While coupon rates are expressed in annualized terms, coupon amounts depend on the coupon payment frequency.
Embedded Options – It is common for a bond issue to include a provision in the indenture that gives either the bondholder and/or the issuer an option.
• Call provision grants the issuer the right to retire the debt, fully or partially, before the scheduled maturity date
• Put provision gives the bondholder the right to sell the issue back to the issuer at par value on designated dates
• Convertible option provides the bondholder the right to exchange the bond for shares of common stock
• Exchangeable option allows the bondholder to exchange the issue for a specified number of common stock shares of a corporation different from the issuer of the bond
Amortization – The principal repayment of a bond issue can call for either – (i) the total principal to be repaid at maturity or (ii) the principal repaid over the life of the bond. In the latter case, there is a schedule of principal repayments called an amortization schedule.
For amortising securities, investors do not talk in terms of a bond’s maturity. A measure called the weighted average life or simply average life of a security is computed for such bonds.