Bond Indenture

The Bond Indenture is the contract made between the issuer and the bondholder or bond owner. This contract includes the maturity, face value, and par value. It may include other options and enhancements for the bond. Based on these factors the Bond Indenture indicates the type of bond, of which there are many. The contract between the two parties must be filled, or the company will be found in default or in bankruptcy.

Maturity

The Maturity of a bond is the date the loan contract expires. On this date, the issuer finishes repaying all due interest and returns the par value to investors. This redeems the bond. Maturity is also called the term of the bond. A short term maturity is under four years, a mid-length term is 5 to 12 years, and a long term is 12 years or more. Most bonds are under 20 years in term, but some terms extend to 30 years. Perpetual Bonds typically have no term length, but most end between 30 and 50 years. Note that callable bonds can be called before their maturity date. A call pre-maturely ends the bond contract before its maturity date, and its term.

Face Value

The Face (or Par Value) both reference the value the bond pays at maturity.  This is not the same as the principal value of the bond. In many cases, the principal paid at issue is discounted compared to the par value. In the secondary market, when bonds are purchased and sold between investors, principal can be above or below par value. Par value should never be confused with principal value. The Face or Par Value is the amount the bond pays the bondholder at maturity.

Coupon Rate

The rate of interest that bonds pay as a percentage of par values is known as the Coupon Rate. The coupon rate is annual interest that bonds pay periodically, usually once every six months or twelve months. Fixed rate bonds do not change once the bond is issued. Adjustable bonds, indexed bonds, or variable bonds, may change their rates according to the cause listed in their prospectus. Bonds known as zero-coupon bonds do not have a coupon rate, but pay interest based on the difference between the principal paid at purchase and the face value paid at maturity.