Bond terms can make a simple idea sound complicated. At heart, a bond is a loan: investors lend your company money, you pay them interest along the way, and you pay the money back on an agreed date. Everything else is detail about how much, when and on what conditions.
If your company is thinking about issuing a bond, these are the words you will hear most. Learn them once and the term sheet becomes much easier to read.
The glossary
Face value (or par)
The amount of each bond that the company promises to repay at the end. If a bond has a face value of £1,000, that is what the holder gets back at maturity, whatever they paid for it.
Coupon
The interest the company pays to bondholders, usually stated as a percentage of face value per year. The name comes from the paper coupons that holders once tore off and presented for payment.
Coupon frequency
How often the coupon is paid: annually, every six months or quarterly. More frequent payments are easier for investors to plan around, but mean more payment dates for the company to manage.
Maturity
The date on which the bond ends and the company must repay the face value. The time from issue to that date is called the term or tenor.
Issue price
What investors pay for each bond when it is first sold. It is often the same as face value, but it can be set slightly below or above it.
Yield
The return an investor actually receives, taking into account what they paid. If a bond’s price falls below face value, the fixed coupon becomes a larger share of the price, so the yield rises. Coupon is what the company pays; yield is what the investor earns on their money.
Yield to maturity
A fuller measure of yield that also counts the gain or loss between the price paid and the face value received at the end, spread over the remaining term. It is the figure professional investors usually compare.
Accrued interest
The interest that has built up since the last coupon date but has not yet been paid. If a bond changes hands between payment dates, the buyer usually pays the seller this amount on top of the price.
Call option
A right for the company to repay the bond early, on set dates and terms. It gives the issuer flexibility to refinance, and investors often expect something in return, such as a small premium. Our article on early redemption and call options goes into more detail.
Secured and unsecured
A secured bond gives holders a claim over specific assets if the company cannot pay. An unsecured bond relies on the company’s general ability to pay. Security usually makes a bond easier to sell, but ties up those assets.
How they fit together
Picture a bond’s life as a line. At the start, investors pay the issue price. Along the line, the company pays the coupon at each payment date, with accrued interest building up between them. At the end, on the maturity date, the company repays the face value, unless it uses a call option to repay early. Running alongside all of this is the yield: the investor’s view of what the whole package is worth to them, which moves as the bond’s price moves. Security sits underneath the line as the safety net if something goes wrong.
Coupon is the company’s cost. Yield is the investor’s return. They start the same and drift apart only when the price moves.
Why this matters to an issuer
You set the coupon, the maturity and the call terms. Investors decide the price they are willing to pay, and therefore the yield. If your terms look unattractive, you will struggle to raise at par. If they are too generous, you pay more than you need for years.
Before choosing a bond, it is worth comparing it with the alternatives. Our piece on whether to choose a bond or a bank loan sets out the trade-offs.
Keep this glossary next to any term sheet you are reviewing. If a term in the document is not on this list, ask your adviser to explain it before you agree to it.
This article is general information, not financial, legal or tax advice. If you are planning a raise, talk to BDM Capital.
Frequently asked questions
The principal, the coupon, the maturity date, the payment schedule, any security and ranking, the covenants the issuer must keep, and the events of default that let holders demand repayment.
The date on which the issuer must repay the principal. Some bonds allow early redemption at the issuer’s option, usually at a premium, and some are repaid in instalments rather than in one sum.
A promise by the issuer, such as keeping debt below a set level, maintaining insurance or providing regular accounts. Breaching a covenant can be an event of default even if interest is being paid.
