COMMON INVESTMENT TERMS EXPLAINED: Part 16

Today we’re moving into some terms that specifically have to do with bonds! If you’re looking to learn more about this type of investing, please reach out.

Coupon: The interest rate the bond pays. This interest rate is usually fixed over the life of the bond. However, there are also bonds with variable interest rates that are tied to an external index.

Current Yield: The yield based on the current market price of that bond.

Face Value / Par Value: Also called the face or principal value of the bond. The owner of the bond is given the face value upon the maturity of the bond.

Maturity: Refers to the length of time until the face value is received. This period of time may be a few months or as long as 50 years.

Yield to Maturity: This calculation uses the current market price, interest rate, time to maturity, and assumes that the interest payments received are reinvested at the bond’s coupon rate. Also referred to as a bond’s “yield.”

• Yield to maturity calculations are extremely valuable because they include all the pertinent information and thus allow comparisons to be made between bond investments.

Zero Coupon Bonds: These don’t provide periodic interest payments. Instead, they are sold at a discount. The only payment the investor receives is the face value at the end of maturity.

Thanks for reading! More terms coming your way next week.