The Three Pillars - Par Value, Coupon, and Maturity

To understand a bond's behavior, you must master the three "fixed" variables that define its contractual identity. While the market price of a bond changes every second, these three pillars remain constant from the day the bond is born until the day it expires.

1. Par Value (The Principal)¹

Par Value, also known as Face Value, is the nominal amount assigned to the bond at issuance.²

• The Repayment Promise: This is the exact amount the issuer agrees to repay the bondholder on the maturity date.³
• The Standard: Most corporate bonds have a par value of $1,000 (or ₹1,000 in India), while municipal bonds often have par values of $5,000.⁴
• Price vs. Par: Bonds don't always trade at their par value.⁵
  • At Par: Trading exactly at 100% of face value.⁶
  • Premium: Trading above par (e.g., $1,050).⁷
  • Discount: Trading below par (e.g., $950).⁸

2. Coupon (The Interest)

The Coupon is the interest payment made to bondholders as compensation for the loan.⁹

• Coupon Rate: The fixed annual interest rate expressed as a percentage of the par value.¹⁰
• Calculation: If you have a bond with a $1,000 par value and a 5% coupon rate, you will receive $50 per year (¹¹$1,000 \times 0.05$).¹²
• Frequency: Payments are typically made semi-annually (twice a year) or annually.¹³
• The "Fixed" Nature: Regardless of whether the bond's market price rises or falls, the dollar amount of the coupon remains exactly the same until maturity.¹⁴

3. Maturity (The Term)

Maturity refers to the specific date on which the bond’s life ends and the issuer must repay the principal.¹⁵

• Time Horizon: Bonds can have maturities ranging from a few months (short-term) to 30 years or more (long-term).¹⁶
• Price Sensitivity: The longer the time until maturity, the more sensitive the bond's price is to changes in market interest rates.¹⁷
• The "Pull to Par": As a bond approaches its maturity date, its market price naturally moves closer and closer to its par value, as the uncertainty of future interest rates diminishes.

Summary: How They Interact