What Is a Bond’s Principal Amount Repaid at Maturity Called?
Understand what the principal amount of a bond repaid at maturity is called, its role, and how it differs from other bond terms.
Bonds are a financial tool used by entities like governments and corporations to borrow money from investors. When you purchase a bond, you are lending money to the issuer. This loan involves a commitment from the issuer to repay the borrowed amount at a future date, along with periodic interest payments.
Understanding Face Value
The principal amount of a bond repaid to the investor at the end of its term is known as its “face value.” This term is often used interchangeably with “par value” or “maturity value.” It represents the nominal or stated value of the bond, determined by the issuer at its initial offering. For example, if a bond is issued with a face value of $1,000, this is the amount the bondholder is promised to receive at maturity. This value remains constant throughout the bond’s life.
Face Value and Bond Mechanics
The face value plays a central role in calculating interest payments. The bond’s coupon rate, the stated interest rate, is always applied to the bond’s face value to determine the dollar amount of interest paid. For instance, a bond with a $1,000 face value and a 5% coupon rate will pay $50 in interest annually, regardless of the price an investor paid for it. These interest payments, often called coupon payments, are typically made at regular intervals until the bond matures.
When a bond reaches its maturity date, the bondholder receives the face value back from the issuer. This marks the end of the bond’s term, and the issuer’s obligation is fulfilled. This repayment ensures investors recover their initial investment at the agreed-upon time.
Distinguishing Face Value
It is important to differentiate a bond’s face value from its market price. While the face value is a fixed amount repaid at maturity, the bond’s market price can fluctuate significantly in the open market. This market price is influenced by factors such as prevailing interest rates, the issuer’s credit quality, and the time remaining until maturity. A bond can trade at a premium (above its face value) or at a discount (below its face value), depending on these market conditions.
Another key distinction is between the coupon rate and the bond’s yield. The coupon rate is the fixed percentage of the face value that determines the periodic interest payment. In contrast, the yield represents the actual return an investor receives, taking into account the bond’s current market price. For example, if a bond is purchased at a discount, its yield will be higher than its coupon rate, as the investor benefits from both the coupon payments and the eventual repayment of the higher face value. This difference highlights that while the coupon rate is constant, the yield reflects the dynamic market value of the bond.