02 Credit Sights Terms to Know

Face Value

$1,000

Price = 100

Bond trading at par

Price > 100

Bond is trading at a premium

Price < 100

Bond is trading at a discount

Example:

Example: A bond trading at 97 is discounted and may rise toward par as maturity nears (assuming repayment).

Coupon

Annual interest payment to bondholders.

Current Yield

Formula = Coupon / Market Price

Face Value

Repayment obligation at maturity

• Size varies:

  • As low as $300 million in IG market

  • Can be much smaller in high yield

  • Up to $5 billion or more

Market Value

• = Face Value × Market Price

• Used to determine index weights

Maturity

Fixed repayment due date of the bond

Call Provisions

• Allow issuers to repurchase bonds before maturity.

• Common in high yield bonds, rare in investment grade.

• Typically not favorable for investors.

• High yield bonds often include a non-callable period, after which bonds can be called at declining prices.

Yield vs. Price

The Inverse Relationship

As yields fall, bond prices rise

Signals investor confidence

As yields rise, bond prices fall

Reflects concern about credit quality or repayment risk.

Risk-Free Rate

Typically the yield on a duration-matched Treasury bond.

Credit Spread

Added yield to compensate for corporate credit risk.

Investor Objectives

• Avoid capital losses.

• Recover par value at maturity.

• Earn a steady annual yield (carry) through interest payments.

• Optional: Profit from bond price appreciation (if yield drops).

Investment Grade Bonds

Usually discussed in spread terms (e.g., "120 bps over Treasury")

High Yield Bonds

• Often quoted in yield percentages (e.g., 6%, 8%, 10%).

• Distressed bonds may be quoted in price terms (e.g., "60 cents on the dollar").

What is the term for annual interest paid to bondholders?

• Maturity

• Coupon

• Face Value

• Current Yield

Coupon