Bonds: face value, coupon, yield.
A bond is a loan you make to a company or government, in exchange for regular interest payments and the return of your principal at maturity. The flip side of a stock: lender, not owner.
When a company wants to raise money, it has two basic options: sell stock (give up partial ownership in exchange for cash, as in Lesson 4) or sell bonds (borrow money in exchange for a promise to pay interest and return the principal at a specified date). Governments do the same: U.S. Treasury bonds, municipal bonds, sovereign debt from other countries — all are the same financial instrument applied at different scales.
A bond is fundamentally simpler than a stock. When you buy a $1,000 face-value bond with a 5% coupon rate and a 10-year maturity, the terms of the contract are fixed in advance: every year for ten years you receive $50 in interest, and at the end of year 10 you get your $1,000 back. The company is contractually obligated to make those payments; if it cannot, it is in default, and you (as a creditor) have legal claims on the company's assets that stockholders do not.
This certainty is the bond's main appeal — and the source of its lower expected return compared to stocks. You give up upside potential in exchange for predictability. This lesson develops the bond vocabulary (face value, coupon, yield) and the arithmetic of a typical bond's life cycle.
Face value, coupon, yield: the three numbers.
Bond prices can drift above or below face value in the secondary market, depending on prevailing interest rates. The current yield is the annual coupon payment divided by the current price (not the face value):
current yield = annual coupon / current price
Bonds trading below face value (called discount bonds) have current yields above their coupon rate; bonds trading above face value (premium bonds) have current yields below their coupon rate. The two move inversely with price.
A $1,000 face-value bond with 5% coupon, 10-year maturity. Buy for $1,000 in year 0; receive $50 each year for ten years (annual coupon payments); receive the $1,000 face value back at maturity in year 10. Total received: $1,500. Total interest earned: $500.
A bond is a fixed-income security: the issuer promises to pay regular coupon payments (equal to face value × coupon rate per year) and to return the face value at maturity. The current yield of a bond is annual coupon / current market price, and may differ from the coupon rate if the bond trades above or below face value.
Words you'll see on every bond quote
- Face value (par) The amount the bond's issuer promises to return at maturity. Almost always $1,000 for U.S. corporate bonds; sometimes $5,000 or $10,000 for institutional issues; sometimes smaller for retail-oriented products.
- Coupon rate The annual interest rate the bond pays, as a percentage of face value. A 5% coupon on a $1,000 bond pays $50 per year. Often paid in two semiannual installments of $25 each, though introductory courses simplify to annual payments.
- Maturity The date (or remaining number of years) until the bond's face value is returned. U.S. Treasury bonds run up to 30 years; corporate bonds commonly 5, 10, or 20 years. Longer maturities expose the investor to more interest-rate risk.
- Current yield Annual coupon divided by current market price, expressed as a percent. A $50 coupon on a bond currently trading for $1,025 has a current yield of 50/1,025 ≈ 4.88%. The current yield differs from the coupon rate whenever the bond's market price differs from its face value.
- Premium vs discount A bond trading above face value is a premium bond (price > $1,000); below face value is a discount bond (price < $1,000). Prices drift based on prevailing interest rates: when rates rise, existing bonds become less attractive and their prices fall (discount); when rates fall, existing bonds become more attractive and their prices rise (premium).
A standard $1,000 corporate bond.
"You buy a corporate bond with face value $1,000, coupon rate 5%, and 10-year maturity. The bond currently trades on the secondary market at $950 (a discount). Compute the annual coupon payment, the total interest earned over 10 years if held to maturity, the total amount received, and the current yield."
Compute the annual coupon payment.
Annual coupon = face value × coupon rate:
Paid every year for the bond's 10-year life.
→ same every yearTotal interest earned over 10 years.
Total amount received.
At maturity, the bondholder receives the face value back, in addition to the coupons collected over the life:
Current yield at the discount price.
The bond trades at $950, not $1,000. Current yield divides the coupon by the market price:
The discount price means a new buyer today earns 5.26% effective yield on their $950 investment, slightly higher than the bond's nominal 5% coupon rate. Plus, at maturity they receive $1,000 back — a $50 capital gain on top of the coupons.
→ discount → yield > coupon rateThree bonds. Compute the key numbers.
A corporate bond has face value $1,000 and coupon rate 4.5%. What is the annual coupon payment in dollars?
A bond has face value $1,000, coupon rate 6%, and 8-year maturity. What is the total amount received if held to maturity?
A bond with face value $1,000 and coupon rate 6% is currently trading at $1,050. What is the current yield, rounded to two decimal places?
Three fast questions before you move on.
Q1. Buying a bond means you are:
Q2. A bond's annual coupon payment is computed against:
Q3. If a bond trades at a discount (below face value), its current yield is:
The lender, not the owner.
Bonds are the predictable counterpart to stocks. A bondholder knows almost exactly what they'll receive across the life of the bond: the coupon payments are contractually fixed, the face value is returned at maturity, and the only real risk is the issuer going bankrupt before the bond matures. That credit risk is the principal reason different bonds have different coupon rates: U.S. Treasury bonds (effectively zero credit risk) pay lower coupons than investment-grade corporate bonds, which pay lower coupons than high-yield ("junk") bonds whose issuers carry meaningful default risk.
Bonds are central to retirement planning. As investors approach retirement, they typically shift money out of stocks (which can drop sharply at inopportune times) and into bonds (whose stream of payments matches the steady spending pattern of retirement). This is the subject of the next lesson and the closer of the course.
Next: Lesson 6, the topic and course finale — diversification and the stock-bond split. Why a real-world portfolio combines both, how the mix changes with time horizon, and how everything you've learned in Topics 1-7 comes together in a single financial-literacy worldview.
Continue to Lesson 06Different angle? Need another rep? These are optional — tap any that look helpful.
Introduction to bonds
Sal introduces face value, the coupon, and what it means to lend money to a company or government in exchange for periodic interest. Cleanest possible intro to bond mechanics.
Relationship between bond prices and interest rates
Sal's followup walking through why bond market price moves inversely to prevailing rates, showing how the coupon (fixed at issue) and current yield (changes with price) diverge. Hits the coupon-rate vs current-yield distinction directly.