This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Bond Basics: 3 Characteristics of Bonds

NEW YORK ( TheStreet) -- Though bonds are astonishingly diverse, the vast majority have a few things in common.

Bonds of all kinds operate on the same basic principle: You as the investor loan money to the bond's issuer, and the issuer pays you interest on the loan, typically twice a year. All bonds have three characteristics that never change:

1. Face value:

The principal portion of the loan, usually either $1,000 or $5,000. It's the amount you get back from the issuer on the day the bond matures. A bond's price, which is in constant flux, can be more or less than the face value.

2. Maturity:

The day the bond comes due. A 30-year bond, for example, comes due 30 years from the day it is issued. Most bonds mature within 30 years, but maturities can be as short as a year or even shorter. Short-term bonds are usually called notes.

3. Coupon:

Because bonds used to come with attached coupons that investors had to clip and redeem for their interest payments (now it's all done electronically), the size of the interest payment is still called the coupon. A bond with an 8% coupon pays 8% of the face value of the bond a year, in two installments. Assuming a face value of $1,000, that's two $40 payments.

...But the Yield on a Bond is Ever-Changing

Another common feature among bonds is that yield is the measure of their value. Think of yields as you would interest rates on a loan. If you're a borrower, you want the lowest possible interest rate. Your lender wants to charge you the highest possible rate.

When you buy a bond, you're the lender, and you want a high interest rate -- or yield.

Generally, the higher a bond's yield, the more credit- or interest-rate risk it carries. Just as borrowers pay more if their credit is bad -- or to borrow for a longer term -- you can get a higher yield from a riskier issuer, or if you are willing to lend your money long term.

Like their prices, bonds' yields are also in constant flux. When a bond's price rises, its yield drops, and vice versa. Here's why: The yield, in essence, is the annual coupon payment divided by the price. If the price -- the denominator -- gets bigger, the yield gets smaller. If the price gets smaller, the yield gets bigger.

The actual formula for the yield is more complicated mathematically, but the upshot is the same: As bond prices drop, the investor who buys that bond for less ends up with a better deal, reflected in a higher yield.

Conversely, if a bond's price rises, the investor who buys it at the higher price is getting a worse deal than the investor who bought it when the price was lower. That worse deal is expressed as a lower yield. All of which is why bond investors like to see dropping interest rates. Dropping yields mean rising bond prices.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,067.33 -105.35 -0.61%
S&P 500 1,985.72 -8.57 -0.43%
NASDAQ 4,515.0860 -12.6030 -0.28%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs