- Bond yield
- Bond yield is the rate of return a bond pays a buyer over time, which depends on the price paid for it and on its coupon.
- Coupon rate
- The coupon rate is the interest a bond pays each year as a share of its face value, fixed when the bond is issued.
Three terms are fixed in every bond
Can you name the three things written into a bond when it is issued?
A bond is an IOU: the buyer lends money now in return for these promises.
The face value is the sum the borrower repays the holder when the bond matures.
Can you think of an example?
Gilt prices are quoted per £100 of face value, the nominal amount, and each £100 nominal repays £100 at maturity, whatever the holder paid.
The coupon is the interest a bond pays each year, as a percentage of its face value, fixed when it is issued.
Can you think of an example?
A 4% gilt pays £4 a year per £100 nominal, as two payments of £2 six months apart.
The maturity date is when the borrower repays the face value along with the last interest payment.
Can you think of an example?
When a gilt matures, the holder gets the final coupon and £100 per £100 nominal.