Bond Features, Yields, and Terminology

Students often struggle with fixed income because several terms sound similar while describing different things. Coupon rate, current yield, yield to maturity, price, and maturity are related, but they are not interchangeable. Chapter 6.2 is about learning those distinctions cleanly.

Once these terms are clear, later pricing and trading questions become much easier.

Face Value, Coupon, and Maturity

Three starting terms appear constantly in bond questions.

Face Value

The face value, par value, or principal amount is the amount that the issuer promises to repay at maturity, assuming no default.

Coupon Rate

The coupon rate is the stated interest rate applied to face value to determine the periodic interest payment.

Maturity Date

The maturity date is the date when principal is scheduled to be repaid.

These terms should not be confused with market price. A bond can trade above or below par while its face value stays the same.

Interest Payment Structures

Not every debt security pays interest in the same way.

• fixed-rate bonds pay the same coupon rate throughout the life of the issue
• floating-rate notes reset their coupon periodically based on a reference rate
• strip or zero-coupon bonds do not pay periodic coupons and are bought at a discount to maturity value

The cash-flow structure affects price sensitivity, reinvestment risk, and how investors think about expected return.

Price Versus Yield

This is one of the most important relationships in fixed income.

• price is what the bond trades for in the market
• yield is the investor’s return measure based on the bond’s cash flows and price

When market yields rise, existing bond prices usually fall. When market yields fall, existing bond prices usually rise.

Coupon Rate Versus Current Yield

The coupon rate is fixed in the bond’s terms. Current yield depends on the market price:

If a bond trades below par, current yield can be higher than the coupon rate. If it trades above par, current yield can be lower.

Students should also know that yield to maturity is broader than current yield because it reflects coupon income plus any gain or loss from holding the bond to maturity.

Term to Maturity

Term matters because fixed-income securities are often grouped by how long they run before repayment.

• short-term instruments usually carry lower interest-rate sensitivity
• medium-term instruments sit between cash-like products and long-duration bonds
• long-term bonds are generally more sensitive to changes in interest rates

At the exam level, the safe rule is simple: longer maturity usually means greater price sensitivity.

Denomination, Liquidity, and Marketability

Investors should also understand the trading features of an issue.

Denomination

The denomination is the standard face-value unit in which the bond is issued or traded.

Liquidity

Liquidity is the ease with which a bond can be bought or sold without moving the price materially.

Negotiability and Marketability

A negotiable and marketable issue can usually be transferred or sold more easily in the secondary market. Highly liquid issues often have narrower bid-ask spreads and more stable quoting.

Liquidity is not a minor detail. Two bonds with similar credit quality can still behave differently in practice because one trades much more actively than the other.

Seniority, Security, and Legal Protection

Not all bonds rank equally if an issuer gets into financial trouble.

Secured Debt

Secured debt is backed by specific assets or collateral. That usually gives investors a stronger claim than unsecured creditors.

Unsecured Debt or Debentures

A debenture is unsecured. The investor relies more heavily on the issuer’s general creditworthiness.

Indenture, Trustee, and Covenants

Corporate issues often include legal protections and operating restrictions.

• the indenture sets out the legal terms of the issue
• the trustee acts on behalf of bondholders in administering the issue
• covenants restrict issuer actions and help protect investors

These terms matter because fixed income is not only about rates. It is also about contractual protection.

Embedded Redemption Features

The cash-flow pattern of a bond may change because of embedded features.

Callable Bonds

A callable bond allows the issuer to redeem the bond before maturity. This usually benefits the issuer, especially if interest rates fall and refinancing becomes cheaper.

Retractable or Putable Bonds

These features give the investor some right to sell or retract the bond before final maturity, depending on the terms. This usually benefits the investor more than a pure callable structure.

Extendible Bonds

An extendible bond gives the investor some option to lengthen the term under specified conditions. This changes the expected holding period and can matter when rates change.

    flowchart TD
	    A[Bond terms] --> B[Coupon and maturity]
	    A --> C[Price and yield]
	    A --> D[Security and ranking]
	    A --> E[Call, retract, or extend features]
	    B --> F[Cash-flow pattern]
	    C --> G[Return analysis]
	    D --> H[Credit protection]
	    E --> I[Reinvestment and redemption risk]

Key Terms

• Par value: Amount promised at maturity.
• Coupon rate: Stated annual interest rate based on par.
• Current yield: Coupon income divided by current market price.
• Yield to maturity: Return measure that includes coupon income and pull to par if held to maturity.
• Callable bond: Bond the issuer may redeem early.

Common Pitfalls

• Treating coupon rate and yield as identical.
• Forgetting that bonds can trade above or below par.
• Assuming callable bonds always favour the investor.
• Overlooking liquidity and term when comparing issues.
• Ignoring legal protections such as ranking and covenants.

Key Takeaways

• Face value, coupon, maturity, price, and yield describe different aspects of a bond.
• Price and yield usually move in opposite directions.
• Current yield and yield to maturity are not the same.
• Liquidity, term, security, and covenants all matter in fixed-income analysis.
• Embedded features change risk and expected holding-period outcomes.

Quiz

Sample Exam Question

An investor is comparing two bonds from the same issuer. Bond X is a senior secured issue with a 5% coupon. Bond Y is a subordinated debenture with a 5% coupon. Both mature on the same date. Which statement is most accurate?

• A. Bond Y is safer because debentures are usually more liquid than secured bonds.
• B. Bond X has the stronger claim in the event of issuer distress because it is senior and secured.
• C. Bond X and Bond Y have the same credit risk because the coupon rates are equal.
• D. Bond Y must have less price volatility because subordinated debt usually trades above par.

Correct answer: B.

Explanation: Senior secured debt generally ranks ahead of subordinated unsecured debt in a distressed-credit scenario. Equal coupon rates do not mean equal credit risk. Liquidity may differ, but that does not override claim priority.