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Bonds-The Three Most Important Elements
Buying a bond may seem as though it would be relatively simple and straightforward but there are actually three very important factors you need to find out about any bond before you consider purchasing it.
These three factors include the coupon rate, the par value and the maturity date. Failure to find out this information can prevent you from making an informed decision regarding the suitability of a bond as a potential investment.
The coupon rate of a bond refers to the amount of interest that you will receive. This amount is expressed as a percentage of the par value. So, if a bond has a par value of £1000 and the coupon rate is `10% then you would receive £100 per year.
Be aware that the bond will also specify when the interest on the bond is to be paid and if it is to be paid on a monthly, quarterly, semi-annual or annual basis.
The par value of a bond refers to the amount of money you, as the investor, will receive when the bond matures.
This means that the organisation that sold you the bond will return the original amount of money that was loaned; referred to as the principal. Traditionally, the par value for corporate loans is around £1000 but it is important to keep in mind that government bonds will generally be higher.
You also need to find out information about the maturity date of the bond. The maturity date refers to the date when the issuer of the bond is required to return the principal to you, as the lender.
Once the issuer of the bond has paid back the principal, there is no longer an obligation to make interest payments. Now, at times, a company may decide to do what is known as calling a bond.
This means that the lenders will receive their money back prior to the maturity date of the bond. It should be noted that all corporate bonds will specify if they can be called and if they can, how soon before the maturity date they can be called. Keep in mind that government bonds are never allowed to be called. State and local government bonds; however, are allowed to be called.
By taking the time to find out this important information you will be in a better position to determine whether a bond investment is the right investment for you.