Each bond can be characterized by several factors. These include:

Face Value

The face value (also known as the par value) of a bond is the price at which the bond is sold to investors when first issued. The face value is the value that is mentioned in the bond certificate. This par value is relevant because it is on this value that the interest rate is paid out. For example, if a bond with par value of Rs.1000 pays coupon of 8%, then the annual rupee interest earned by you will be Rs.80. There is another significance of the par value / face value of the bond. Face value also represents the price at which the bond is redeemed at maturity. Irrespective of whether you buy the bond in the open market at a discount to the face value or at a premium to the face value, the redemption will always be done at the par value only.

Coupon Rate

The periodic interest payments promised to bond holders are computed as a fixed percentage of the bond’s face value; this percentage is known as the coupon rate. The rate of coupon shifts from time to time based on the prevailing rates in the market and the credit rating of the borrower. Normally, higher the credit rating, the lower is the coupon interest rate you need to pay.

Coupon Amount

A bond’s coupon is nothing but the coupon rate expressed in rupee terms. For example an Rs.1000 face value bond with 7% coupon rate will pay interest at the Rs.70 per year if it is annual payments and Rs.35 every six months if it is half yearly interest payments. The coupon amount is nothing but he coupon rate multiplied by the face value of the bond. The rupee value of the periodic interest payment promised to bondholders; this equals the coupon rate times the face value of the bond. Coupon amount is the actual interest you earn in rupee terms.

Maturity of the bond

A bond’s maturity is the length of time until the principal is scheduled to be repaid. In India, bonds typically have maturity periods of 5 years or seven years. A bond’s maturity usually does not exceed 30 years and above that it is almost like a perpetual bond. Occasionally a bond is issued with a much longer maturity; for example, the Walt Disney Company issued a 100-year bond in 1993 and Reliance had issued Century Bonds in 1997. There have also been a few instances of bonds with an infinite maturity; these bonds are popularly referred to as a consol. With a consol, interest is paid forever, but the principal is never repaid.

Callable Bond

Many bonds contain a provision that enables the issuer to buy the bond back from the bondholder at a pre-specified price prior to maturity. This price is known as the call price. A bond containing a call provision is said to be callable. As the name suggests it is an option that the issuer of the bond has. This provision enables issuers to reduce their interest costs if rates fall after a bond is issued, since existing bonds can then be replaced with lower yielding bonds. Since a call provision is disadvantageous to the bond holder, the bond will offer a higher yield than an otherwise identical bond with no call provision. For example, in the mid 1990s, companies like IFCI and IDBI had issued 25 years bonds at high yields. When the rates crashed post 1998, most of these large banks called back these bonds and then opted to issue fresh bonds in the open market at much lower yields. This had actually put many millionaire dreams of investors on hold. A call provision is known as an embedded option, since it can’t be bought or sold separately from the bond. These options are distinct from stock options and index options traded on the stock exchanges and which can be traded as a separate product.

Puttable Bond

Some bonds contain a provision that enables the buyer to sell the bond back to the issuer at a pre-specified price prior to maturity. This price is known as the put price. A bond containing such a provision is said to be puttable. This is again an example of an embedded option. This provision enables bond holders to benefit from rising interest rates since the bond can be sold and the proceeds reinvested at a higher yield than the original bond. Since a put provision is advantageous to the bond holder, the bond will offer a lower yield than an otherwise identical bond with no put provision. Puttable bonds are quite rate in the Indian context. Even in the case of a puttable option, it is the put price that really matters a lot.

Sinking Fund Provisions

Some bonds are issued with a provision that requires the issuer to repurchase a fixed percentage of the outstanding bonds each year, regardless of the level of interest rates. A sinking fund reduces the possibility of default; default occurs when a bond issuer is unable to make promised payments in a timely manner. Since a sinking fund reduces credit risk to bond holders, these bonds can be offered with a lower yield than an otherwise identical bond with no sinking fund.