Par, coupon, maturity: what do a bond's terms actually mean?

Bond terminology looks like jargon and is actually plumbing. Four terms, each doing one job. Get them exactly right now and the arithmetic of the whole course falls out for free.

Face value (par)

The face value is the amount the issuer repays at maturity. It is also called par value or principal, and the three words mean the same thing.

Two things confuse newcomers:

• Face value is not what you pay. You might pay $960 or $1,040 for a $1,000 bond. Face value is what comes back.
• Face value is the base for the coupon calculation, always — never the price you paid.

Typical denominations: $1,000 for US corporate bonds, $100 face for many quoted government bonds, €100,000 minimums for some European corporate issues (a fact we'll return to in the last unit, because it quietly explains why retail investors are absent from this market).

Coupon

The coupon rate is the annual interest, expressed as a percentage of face value. A 5% coupon on a $1,000 bond pays $50 a year. Forever? No — until maturity, and then it stops.

The name is a fossil. Bonds used to be physical paper with detachable coupons around the edge; you clipped one off and posted it in to collect your interest. The paper is gone, the word stayed.

Two details that matter more than they look:

• Payment frequency. Most US and UK bonds pay semi-annually — a 5% coupon on $1,000 is $25 every six months, not $50 once a year. Most euro-area government bonds pay annually. Always check, because it changes the arithmetic.
• The coupon never changes. Not with rates, not with inflation, not with the issuer's profits. (Floating-rate notes and inflation-linked bonds exist and do adjust — but they are variations on this fixed-coupon base case, and later courses handle them.)

Maturity

The maturity date is when the face value is repaid and the bond ends. Everything from overnight to a hundred years exists. The market's rough shelves:

• Money market / bills — under 1 year
• Short — 1 to 3 years
• Intermediate — 3 to 10 years
• Long — 10 to 30 years, occasionally beyond

Maturity is the term with the longest reach. It decides how long your money is committed, how long you are exposed to the issuer surviving, and — as Unit 2 shows mechanically — how violently the price swings when rates move.

Issuer

The issuer is whoever owes you the money. It is the term that decides whether the promise is worth much. A national treasury borrowing in its own currency and a small manufacturer borrowing to buy machines are making the same kind of promise with wildly different backing. Unit 3 is entirely about this.

Putting the four together

Read this line the way a practitioner does:

"Northwind Industries 4.5% 15-Mar-2032, $1,000 face, semi-annual."

Decoded: Northwind owes you $22.50 every 15 March and 15 September (4.5% of $1,000, split in two), and $1,000 on 15 March 2032, at which point the bond is gone.

Count the cash if the bond is bought at issue in March 2025: seven years remaining × 2 payments × $22.50 = $315 in coupons, plus $1,000 principal = $1,315.

Now the important twist. Suppose you buy that bond in the secondary market for $940 instead of $1,000. The coupon does not become 4.5% of $940. It is still $22.50 twice a year, because the coupon is glued to face value. What changed is your return: you paid $940 to receive $45 a year plus $1,000 back. That gap between what you paid and what the contract pays is where yield comes from — the subject of the next unit.

In the data

"The 10-year yield" is not a bond. It is a point on the curve that always sits exactly ten years from today, however many years pass. A real bond has a real end date. The table shows the difference on the shortest Treasury bill: on consecutive days the label reads four weeks, but the second day's row is a different, newly auctioned bill with its own security number and a repayment date one week later.

Read a maturity label as a length, and a repayment date as a contract. A yield series quoted by maturity never tracks one bond.

Try it now

1. Compute the semi-annual payment on a $1,000 bond with a 6% coupon. (Answer: $30, twice a year.)
2. Same bond, bought for $1,050. What is the semi-annual payment now? (Still $30 — the coupon never keys off your purchase price. If you hesitated, re-read the coupon section.)
3. Below is the newest US Treasury curve: one yield per maturity, all on the same date. Read the 1-month, 2-year, 10-year and 30-year yields and write them in a row. Same borrower, four different lengths of promise, four different prices for time. Those numbers are the raw material for everything in Unit 2.