In basic terms a bond represents a loan obligation of the bond issuer to the bondholder. Basically the investor loans money to the bond issuer in return he gets interest payed over ar a set period of time. At the end of this time period the bond issuer pays the investor back the money he was loaned. A simple bond investment can be where a you lend the bank money in the form of a deposity. The bank then pays you interest for the use of that money for a set period of time. The bank then re-investsuses that money in other areas such as mortgages.
Face value is the value of the bond certificate and received at maturity. Bond investments can be affected by changes to interest rates change and if you need to sell a bond before if matures, the value of the bond you receive may change. With a rise in interest rates a Bond may sell for less than its face value. When this happens an investor may buy another bond paying a higher rate so the level of interest shown by bond investors decreases. With a decrease in interest rates, the first bond may sell at a premium as other bond investors will be willing to pay more for the higher interest rate.
The Coupon Rate is the interest rate printed on the bond certificate when issued. The stated interest rateis usually an annual fixed rate typically paid every 6 months to the investor.
The Maturity date is the day when the full value of the bond must be repaid. The Coupon Rate remains the same until the maturity date. Bond maturities can run from months to 10's of years thus bond investment is best suited to those looking for long term investment.
It is possible for the bond issuer to pay the bond investor the full value for the bond and buy the bond back before it matures. This then allows the bond issuer to then reissue a bond at a lower interest rate. This process in known as 'Calling'. If a bond is called, investors may then need to reinvest their money at a lower interest rate as well. Thu reducing the risk to their bind investment.
Default of an bond investment is the failure of the bond issuer to make payment on the interest or money borrowed. Therefore exposing the bond investor to the risk of not being paid.
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