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Coupon, Face Value, Maturity, YTM

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Coupon, Face Value, Maturity, YTM

Every bond tells a numerical story. On the bond's face are printed (or recorded digitally) four critical numbers: the principal amount you will receive at the end (face value), the annual interest payment until that day (coupon), the date when the loan ends (maturity), and the annual return you earn if you buy today and hold until that date (yield to maturity). These four numbers—face value, coupon, maturity, and yield to maturity—are so tightly bound that understanding any one of them requires understanding all four. They are the grammar of bond investing.

The face value is the anchor. It fixes the principal at, usually, $1,000 (or £100, or €100 in different markets). This is the amount you will receive back when the bond matures, no matter what you paid for it today. The certainty of par repayment is what makes a bond a bond and not an equity. You are lending a fixed amount of money and expecting it back.

The coupon is the rent you collect while you wait. A 4% coupon on a $1,000 face value bond pays you $40 per year—or $20 semi-annually if your market follows the U.S. convention, or £40 once a year if you are investing in UK gilts. The coupon is set when the bond is issued and, for fixed-rate bonds, never changes (though floating-rate bonds adjust coupons periodically based on market conditions). The coupon is expressed as a percentage of face value, not as a percentage of the price you paid. If you bought that 4% coupon bond for $950 instead of $1,000, you still receive $40 per year.

Maturity is the countdown timer. It tells you how long you must wait for the principal. A bond issued today with a ten-year tenor will mature ten years from now. As time passes, the remaining maturity shrinks. In five years, the same bond will have five years of maturity left. Maturity is more than a date; it is the defining risk factor. A bond with one year remaining to maturity is far less sensitive to interest rate changes than a bond with twenty years remaining. This maturity-driven sensitivity is called duration, and it shapes everything from portfolio construction to risk management.

Yield to maturity is the internal rate of return. It folds together the coupons you will collect, the principal you will receive at maturity, and the price you paid today into a single, annualized return percentage. A bond with a 4% coupon yielding 5% to maturity must be trading below par (you paid less than $1,000 for it) so that the capital gain at maturity bumps your total return from the coupon rate to the higher yield. A bond with a 5% coupon yielding 4% to maturity must be trading above par, so that the capital loss at maturity reduces your total return from the coupon rate to the lower yield. Understanding YTM is understanding the true return you will earn.

This chapter is a deep dive into these four dimensions of bond mathematics. You will learn what face value is and why par matters; how coupons are set and whether they are fixed or floating; how maturity shapes interest rate risk and why long-dated bonds feel riskier; and how yield to maturity brings all four numbers into alignment to give you the full return picture. You will also encounter the related yield measures—current yield, yield to call, yield to worst, bond equivalent yield, redemption yield—and see how they fit into the analyst's toolkit. You will understand discount and premium bonds, the strange algebra of callable bonds, and the special case of par bonds where coupon equals yield and everything aligns.

The payoff for mastering these four numbers is clear: you will be able to pick up any bond, look at its data, and immediately understand the return you will earn, the risks you are taking, and whether the price is attractive relative to alternative investments. You will spot callable bonds, anticipate what happens if rates fall, and know whether a high coupon is a gift or a trap. You will read fund prospectuses with confidence and understand what your fund manager is doing with your money.

Bond investing is not alchemy. It is arithmetic—disciplined, repeatable arithmetic applied to a simple contract: you lend money, you get paid interest, you get your principal back. Face value, coupon, maturity, and yield to maturity are the variables in that equation. Learn them thoroughly, and the rest of bond investing—duration, convexity, credit spreads, portfolio construction—becomes a matter of building on this foundation.

What's in this chapter​

How to read it​

You can read this chapter in order, from face value through par bonds, and it will take you on a logical journey. Face value introduces par as the redemption target; coupon rate explains how much income you collect along the way; maturity and payment frequency describe the timing of your cash flows; current yield and YTM introduce the return measures, with current yield as the simpler income-only measure and YTM as the complete total-return measure. Callable bonds and yield to worst build sophistication, handling the complexity of embedded options. Bond equivalent yield and international yields (running yield vs. redemption yield) address the practical reality of investing across borders and payment frequencies. Discount, premium, and par bonds show you how the four numbers interact in the market.

Alternatively, you can jump to the topics most relevant to your situation. If you are buying a bond fund, read face value, coupon, YTM, and discount vs. premium bonds. If you are evaluating corporate bonds with callable features, read coupon rate, yield to maturity, yield to call, and yield to worst. If you are investing internationally, read payment frequency, running yield vs. redemption yield, and bond equivalent yield. Each article is self-contained while building on earlier concepts.

The practical work—calculating which bond offers the best value, sizing a bond position, managing interest rate risk—lies in later chapters on duration, convexity, and portfolio construction. This chapter is the vocabulary and arithmetic you will need.