Bonds can be issued by companies or governments and generally pay a stated interest rate.
The market value of a bond changes over time as it becomes more or less attractive to potential buyers.
Bonds that are higher-quality (more likely to be paid on time) generally offer lower interest rates.
Bonds that have shorter maturities (length until full repayment) tend to offer lower interest rates.
Bonds are issued by governments and corporations when they want to raise money. By buying a bond, you’re giving the issuer a loan, and they agree to pay you back the face value of the loan on a specific date, and to pay you periodic interest payments along the way, usually twice a year.
Unlike stocks, bonds issued by companies give you no ownership rights. So you don’t necessarily benefit from the company’s growth, but you won’t see as much impact when the company isn’t doing as well.
Bonds, then, give you 2 potential benefits when you hold them as part of your portofolio: They give you a stream of income, and they offset some of the volatility you might see from owning stocks.
The language of bonds can be a little confusing, and the terms that are important to know will depend on whether you’re buying bonds when they’re issued and holding them to maturity, or buying and selling them on the secondary market.
Coupon: This is the interest rate paid by the bond. In most cases, it won’t change after the bond is issued.
Yield: This is a measure of interest that takes into account the bond’s fluctuating changes in value. There are different ways to measure yield, but the simplest is the coupon of the bond divided by the current price.
Face value: This is the amount the bond is worth when it’s issued, also known as “par” value.
Price: This is the amount the bond would currently cost on the secondary market. Several factors play into a bond’s current price, but one of the biggest is how favorable its coupon is compared with other similar bonds.