A bond is a contract. Before you price one or hedge one, you need to read what the issuer promised, what it cannot do, and what triggers default. Get the features straight first.
Issuer. Sovereigns, non-sovereign (municipal) governments, supranationals (World Bank, IMF), quasi-government agencies, and corporates. Issuer type drives credit risk and tax treatment.
Maturity. The date principal is repaid. "Term to maturity" is the remaining time. Money market instruments mature within one year. Notes typically run 2 to 10 years. Bonds run beyond 10. Perpetual bonds have no maturity.
Par Value. Face value, also called principal or nominal value. Typical par is $1,000 for corporate bonds. Bonds trade at a percentage of par: a quote of 98.50 means 98.5% × par.
Coupon Rate and Frequency. The contractual interest rate applied to par. A 5% coupon on $1,000 par pays $50 per year. US corporates usually pay semi-annually; Europeans often pay annually. Structures include plain vanilla (fixed),
- floating-rate notes (reference rate plus margin, reset periodically),
- zero-coupon (deep discount, no coupon),
Common mistakes
- Confusing par with market price. Par is fixed; market price moves with yields. A bond quoted at 102.5 trades at $1,025 per $1,000 par, not $102.50.
- Treating callable and putable as symmetric. A call helps the issuer; a put helps the investor. Callable bonds yield MORE; putable bonds yield LESS. Trap: assuming both raise required yield.
- Calling a coupon schedule a covenant. Coupon terms are part of the bond's economics, not covenants. Covenants govern issuer behavior outside the cash-flow waterfall.
Bottom line
- Core features: issuer, maturity, par value, coupon rate and frequency, currency, seniority, embedded options
- Coupon structures: fixed, floating, zero, step-up, deferred, and inflation-linked
- Seniority ranks claims from secured down to junior subordinated; most investment-grade corporates are senior unsecured
- Indenture = legal contract between issuer and bondholders, enforced by a trustee
Exam shortcut
Walk the seven-item feature list in order: issuer, maturity, par, coupon, currency, seniority, options. When classifying a covenant, look at the verb. "Shall" plus an action is affirmative; "shall not" plus an action is negative. For yield direction, remember the rule: issuer-friendly options up, investor-friendly options down.
The full lesson (about 1,557 words, 10 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- instrument features
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