Basics

Companies issue bonds to finance operations. Bonds are recorded in the liabilities section of the company’s balance sheet. A bond may trade at a premium (above) or discount (below) to its par or face value. The trading value depends on interest rates, the coupon rate (percentage of face value paid as interest per year) and other conditions such as the financial health of the issuer.

Maturity Dates

On the maturity date, a bond’s par value is repaid and interest payments stop. Although a bond may trade at a premium or a discount, the prices generally converge to par as the maturity date approaches. Prices change with interest rates more for longer-term bonds (i.e. bonds with maturity dates farther out than shorter-term bonds) because of the longer stream of interest payments that might be above or below current market rates. This makes the bonds more or less appealing to investors. According to a Charles Schwab analysis of Bloomberg-supplied government bond data, in a six-month period of falling interest rates in the second half of 2008, a 30-year bond’s market value rose more than twice as much as a 10-year bond. Similarly, in a six-month period of rising interest rates in the first half of 2009, a 30-year Treasury bond’s market value fell almost three times as much as a 10-year bond.

Risk Management

References

Resources

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