Par Value – Initial offering price of the bond (typically $1,000 for corporate, $5,000 for municipal and $10,000 for federal)
Coupon Rate – This is the interest rate you expect to receive annually over the life of the bond. Typically made in semi-annual payments (2 times a year).
Maturity Date – The date when the bond will come due. You no longer are receiving any coupon payments and your initial investment is paid back in full.
Primary Market – This references when the bond is first sold by its institution. The bond sells at par value.
Secondary Market – After the bond has been taken by an investor the investor can sell the bond to other investors. The bond may or may not sell at par value to other investors.
Premium or Discount – If a bond sells for less than par value, then it’s selling at a discount (less than $1,000 for a corporate bond). If a bond sells for greater than par value, the it’s selling at a premium (greater than $1,000 for a corporate bond).
What causes bonds to sell at a premium or discount? – When the going interest rate changes (coupon rate) for bonds with certain maturity dates, this will cause the bond to sell for a premium or a discount.
- Rule – If the going rate is now higher than what your coupon rate is, then your bond will sell at a discount. If the going rate is now lower than what your coupon rate is, then your bond will sell at a premium.
- Do a search for a bond price calculator or formula if you need the exact number.