Bond Fundamentals & Par Value — Q&A

$50 per year ($1,000 × 5%), paid in two semi-annual installments of $25. Coupon payments are always based on par and the stated rate, regardless of purchase price.

(1) Semi-annual coupon interest of $40 per year based on par, and (2) the $200 discount gain when the bond matures at $1,000. Discount bonds combine coupon income with price appreciation to par.

It is a default. Unlike dividends, interest cannot be skipped — bondholders can sue, and the issuer may be forced into bankruptcy court.

Bearer bonds belong to whoever physically holds them (outlawed for new U.S. issuance in 1982). Book-entry bonds have no paper certificate; ownership is tracked digitally by a transfer agent — the modern standard.

Longer maturities carry more risk — interest rates, the economy, and markets can change significantly over decades. Investors demand higher rates to compensate for that uncertainty.

Interest is paid January 1 and July 1 (six months apart). The July 1 payment compensates the holder for ownership from January 1 through June 30.

They are issued at a discount and mature at par; return equals the difference between purchase price and par received at maturity. With no interim payments, they provide no cash flow until maturity — often many years away.

The bond’s market value falls (rates up → prices down). If rates had fallen instead, strong demand for the higher coupon could push the price above par — a premium bond, where the investor gains coupon income but loses money at maturity because the bond still redeems at par.

The primary market is where the issuer first sells bonds and receives borrowed capital (e.g., an IPO). The secondary market is where investors trade existing bonds among themselves after the initial sale.

Money markets. Short maturities are safer with lower yields; long maturities are riskier with higher yields.