There are three main components of a Bond. It’s important to understand each component before buying a bond.
The face value is the amount of money that the issuer has agreed to pay on a bond when the bond matures. When you buy a bond and the amount you pay for it, called the principal amount, is the same amount as the face value, the bond is called a Par Bond. When you buy a bond and pay more than the face value for it, the bond is called a Premium Bond. When you buy a bond and pay less than the face value for it, the bond is called a Discount Bond.
Coupon / Interest Rate
The coupon is the interest rate, or additional money, that the issuer pays you every year for borrowing the money. For the issuer, the interest rate is its cost to borrow money. For an investor, the interest rate is the return you get for lending money to the issuer (assuming a par bond). Usually the riskier the issuer, the higher the interest rate on the bond. This is because investors want to get paid more money when they lend money to a riskier borrower.
The maturity date is the end date of the bond and it’s when the issuer pays you the face value of the bond. The maturity date also classifies a bond into one of three categories: short-term, medium-term or long-term. A bond that has a maturity date of one to three years is considered short-term. A bond that has a maturity of four to 10 years is considered medium-term. A bond that has a maturity of 10+ years is considered long-term.