Before investing in bonds, it is important to understand their main characteristics to be able to evaluate their features and risks.
A bond prospectus specifies this information for each bond issue*.
This information is also listed on our website: live.euronext.com/en/products/fixed-income/list.
Nominal rate: the nominal (or coupon) rate is set when the bond is issued and serves as the basis for periodic interest calculations. It can be fixed or variable. Where a bond has a variable (or floating) rate, the benchmark rate to be used to calculate coupons is set at the time of issue. The applicable interest rate is calculated for each period, taking into account any changes in the benchmark rate.
Nominal value: the nominal (face or par) value is the amount used as a basis for coupon calculations. Depending on the type of investors a bond is intended for, the issuer may choose a higher or lower nominal value.
Coupon: the coupon is the interest the issuer pays the bondholder. Coupon payments may be made on a quarterly, semi-annual, or annual basis. An annual coupon is calculated by multiplying a bond’s coupon rate by its face value. The interest accrual date is the initial date used to calculate coupon to be paid on first coupon date. It may fall prior to or after the subscription date, in which cases it will increase or decrease the first coupon payment. After the initial coupon period, coupon is calculated using the coupon dates.
Issue price: the issue price is the price paid by the bond subscriber on issue. It may differ from the nominal value. When the issue price is the same as the nominal value, it is said to have been issued ‘at par’. Subscribers benefit from an issue premium when the issue price is less than the nominal value.
Redemption value: the redemption value is the price paid to the bondholder as repayment of the capital lent initially. It may be higher than the nominal value, in which case the bondholder will benefit from a redemption premium. Similarly it may be lower than the nominal value, in which the bondholder will receive less than face value.
Maturity date or due date: the bond prospectus states the duration of the loan and its maturity date. Some bonds include specific early redemption clauses. There are perpetual bonds that do not have a maturity date, for which investors receive an annual coupon. Yield to maturity or redemption yield: this can be calculated at any time. The yield to maturity is the internal rate of return should the bondholder hold the bond until it matures. It is calculated from the number of coupon payments, their value, and the difference between the current market price of the bond and the redemption value of the capital on maturity.
Remaining time to maturity: the residual maturity of a loan is the time remaining until the due date.
Methods of repayment and amortisation/depreciation:
There are several ways that capital lent through a bond can be repaid:
- For bullet bonds, the capital is repaid in one lump sum at maturity. This is the most common repayment method on the bond markets.
- Repayment through amortisation occurs over the life of the bond. A portion of each payment is allocated to repayment of the initial capital. Holders whose bonds are drawn prior to the due date have had all their capital repaid.
- Annuities. The issuer pays a fixed amount each period, and the amount allocated to the repayment of capital progressively increases over the lifetime of the loan.
- Finally there are zero-coupon bonds. These carry no coupon, but are issued at a discount. This discount corresponds to a “coupon” when the bond is repaid on maturity
*Companies must publish a bond prospectus prior to a bond issue for public information.