Face Value: This is the amount that will be repaid on maturity. It is also known as par value or principal. Usually, newly issued bonds are sold at face value. Most investors confuse face value with market price. However, the two may differ as the market price is determined by several factors, the most important being interest rate.
Coupon Rate: This is the interest rate that a bond pays. It is also called nominal yield and is expressed as a percentage of face value. So, if a bond has a face value of Rs 1,000 and a coupon rate of 10, it will pay Rs 100 as interest every year. For most bonds, the coupon rate is fixed, but for some it is adjustable to a benchmark. This adjustable coupon rate bond offers protection against interest rate risk and floating rate mutual funds invest in it.
Current Yield: While yield is the return offered by a bond, current yield considers the market price, which can differ from face value. It is calculated by dividing the interest by the current market price. So if you pay Rs 850 for a bond with a face value of Rs 1,000 and a coupon rate of 10 per cent, the current yield is 11.76 per cent(100/850). The current yield equals the coupon rate if the bond is bought at par.
Maturity: This refers to the period after which the face value is to be repaid. Generally, the longer the period, the higher the interest or coupon rate.
Yield to Maturity: It measures the total return offered by a bond if held till maturity and is used to compare bond returns with those from other asset classes. It considers current market price, time to maturity and includes all interest payments. It is assumed that interest payments are reinvested at the current yield. When newspapers and brokerages report bond yield, the reference is to YTM.
Yield Curve: It's an important tool for bond market analysis and is derived by plotting bond yields against their maturities. Only similar sets of bonds are grouped in the curve— treasury bonds, gilt bonds or those with similar rating profiles. It acts as a benchmark for debt instruments and can predict economic cycles. If the curve slopes upwards, an easy monetary policy is expected from the central bank, which is good for stocks and the economy. If the curve slopes downwards, one can expect monetary tightness. This implies that the central bank is trying to slow down economic growth. A flat yield curve implies economic uncertainty.
