Face value, coupon payments, maturity dates, yield, and how bonds are priced at par, premium, or discount.
In this lesson you'll learn
How stocks and bonds differ: owner vs creditor
The four components of every bond: face value, coupon, maturity, yield
Why bonds trade at par, premium, or discount
The difference between coupon rate, current yield, and YTM
How credit ratings work and what investment grade means
Stocks vs Bonds — Two Ways to Fund a Company
When a company needs money, it has two choices: sell equity (issue stock — you become a part-owner) or borrow money (issue bonds — you become a creditor). As a bondholder, you don't own the company. You lent it money. It owes you fixed payments and the return of your principal.
This distinction matters enormously. As a stockholder, your upside is theoretically unlimited — but you can lose everything. As a bondholder, your return is fixed and contractually owed to you. The company must pay bondholders before it can pay stockholders.
Stockholder (Equity)
→Part-owner of the company
→Profits depend on company performance
→Dividends are discretionary — not guaranteed
→Last in line if the company goes bankrupt
→Unlimited upside, but can lose 100%
Bondholder (Creditor)
→Lender to the company — not an owner
→Fixed coupon payments regardless of profits
→Contractually owed payment — legally enforceable
→Paid BEFORE stockholders in bankruptcy
→Capped upside, but far more predictable
Key asymmetry: in bankruptcy, bondholders get paid BEFORE stockholders. That's why bonds are considered "safer" — you're a creditor, not an owner. Safer doesn't mean risk-free; it means the risk profile is fundamentally different.
The Anatomy of a Bond
Every bond has four core components. Understanding how they interact is the foundation of all fixed income investing.
Face Value (Par)
$1,000 — the amount the issuer repays at maturity. This is the standard for US bonds. It's also the base for coupon calculations.
Coupon Rate
5% annually — fixed at issuance. Tells you what percentage of face value you receive in interest each year, forever.
Coupon Payment
$50 per year, usually paid as $25 every 6 months. It's 5% × $1,000 ÷ 2. This never changes — regardless of what happens to the price.
Maturity Date
Jan 15, 2034 — when the issuer repays the $1,000 face value. The bond ceases to exist. You get your principal back.
Par, Premium, and Discount Pricing
Bonds trade in the secondary market at prices that differ from face value. The price adjusts so that the bond's effective yield matches current market interest rates.
Scenario
Market Rate
Bond Price
Yield
Why
At par
5% (same as coupon)
$1,000
5.0%
Price = face value
At premium
3% (below coupon)
$1,100
~4.5%
Old 5% coupon is valuable
At discount
7% (above coupon)
$909
~7.0%
New bonds pay more
The intuition: if new bonds pay 7% and your old bond pays only 5%, no one will pay full price for it. The price falls until the effective yield is competitive. If new bonds pay only 3% and yours pays 5%, everyone wants it — the price rises above par until the yield comes back down to ~3%.
Yield vs Coupon Rate — What's the Difference?
Three different "yield" concepts are used in bond investing, and they mean different things:
Coupon Rate
Fixed at issuance. Always 5% of $1,000 = $50/year. Never changes regardless of price. This is the rate printed on the bond.
5% coupon on a $1,000 bond = $50/year forever.
Current Yield
Coupon ÷ current market price. Changes as the price moves. Gives a quick sense of return but ignores capital gains/losses at maturity.
If price is $900: current yield = $50 ÷ $900 = 5.56%.
Yield to Maturity (YTM)
The total return if you hold the bond to maturity — accounts for price paid, all coupon payments, and the return of face value at maturity. This is what investors actually care about.
Buy at $900, receive $50/yr for 10 years, receive $1,000 at maturity. YTM ≈ 6.4% (includes the $100 'capital gain' of par recovery).
YTM is the number that matters most. When financial news says a bond "yields 4.8%," they almost always mean yield to maturity — the all-in annualized return if you hold to maturity. Use YTM when comparing bonds of different prices and coupon rates.
Credit Rating — The Risk Spectrum
Bonds are rated by credit agencies (Moody's, S&P, Fitch) based on the issuer's ability to repay. Higher rating = lower yield (safer issuers can borrow at lower rates). Lower rating = higher yield (investors demand more return for more default risk).
Investment grade (BBB/Baa and above) means most institutional money can hold it. "Junk" or "high-yield" (BB/Ba and below) means the issuer has a material risk of default — investors demand 3–8% more yield to compensate. Most pension funds and insurance companies are legally prohibited from holding junk bonds.
Quick Knowledge Check
3 questions · test what you've just learned
1
You buy a bond with a $1,000 face value and a 6% coupon. What annual payment do you receive?
2
A bond has a 5% coupon but is trading at a discount ($920). Its current yield is approximately:
3
What does it mean when a bond trades 'at a premium'?
✓ Key takeaways from Lesson 1
Bondholders are creditors, not owners — they get paid before stockholders in bankruptcy.
Every bond has four components: face value ($1,000), coupon rate (5%), maturity date, and yield (depends on price paid).
Bonds trade at par, premium, or discount depending on how their coupon compares to current market rates.
Yield to maturity (YTM) is the all-in return if held to maturity — the most important yield measure.
Credit ratings (AAA to junk) reflect default risk; higher risk = higher yield demanded by investors.