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A bond is a negotiable debt security by which an issuer (the entity that is borrowing the money) which agrees to pay a fixed amount of interest over a specified period of time and pay back the principal amount borrowed when the bond matures. The principal amount of the bond is known as the face value or the par value.
The par value or face value of a bond is usually issued in denominations of $1,000. The maturity date is the date on which the issuer of the bond retires the bond and pays the bondholder its par value. Bonds with maturities of one year or less from the date of issuance are referred to as short-term bonds. Bonds with maturities of one to 10 years are referred to as intermediate bonds. Long term bonds have maturities of longer than 10 years.
Bonds have two types of maturities. The most common is a term bond in which the bonds of a given issue all mature on the same date. A serial bond has different maturity dates within the same issue.
The coupon rate (interest rate) of a bond determines the amount of interest paid by the bond, which is generally stated as a percentage of the par value. Some bonds have adjustable or floating interest rates, which are tied to a particular index. The interest payments fluctuate based on the underlying index.
A call provision attached to a bond allows the issuer to repurchase (call) a bond at a predetermined fixed price prior to its maturity date. If a bond is called, the issuer no longer pays interest on the bonds, forcing holders to relinquish their bonds. The call price is the price an issuer pays to retire a bond called before maturity. The call price generally is equal to the face value of the bond plus a call premium. The call premium is the amount of money an issuer adds to the bond’s face value.
A put provision allows bondholders to sell their bonds back to the issuer at a specified price (usually the face value) before their maturity dates. A put provision is unusual.
Please keep in mind that the above information is being provided for informational purposes only. It is not designed to be complete in all material respects. Thus, it should not be relied upon as legal or investment advice. If you have any questions concerning the contents of this post, you should consult a qualified professional.
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