Bonds are financial instruments that companies and governments use to raise funds. They're essentially loans from investors, who buy the bonds and receive interest payments in return. There are several key terms to understand when it comes to bonds, including face value, accrued interest, and settlement price.

Face Value of a Bond

The face value of a bond is the amount that the issuer promises to pay the investor when the bond matures. This is also called the "par value" or "principal" of the bond. For example, if a company issues a bond with a face value of ₹10,000 and a maturity of 10 years, the investor will receive ₹10,000 when the bond matures.

Accrued Interest on a Bond

Accrued interest is the interest that has accumulated on a bond since the last interest payment. Bonds typically pay interest semi-annually or annually, and the amount of interest paid is based on the bond's coupon rate. For example, if a bond has a coupon rate of 5% and a face value of ₹10,000, the investor will receive ₹500 in interest payments each year. If the investor sells the bond before the next interest payment is due, they are entitled to the accrued interest for the time they held the bond.

Settlement Price of a Bond

The settlement price of a bond is the price at which the bond is traded between buyers and sellers. This price takes into account factors such as the bond's face value, coupon rate, time to maturity, and prevailing interest rates in the market. The settlement price can be higher or lower than the face value of the bond, depending on market conditions.

How These Terms Affect Bond Investors

Understanding these terms is important for bond investors because they can impact the return on investment. For example, if an investor buys a bond at a price below the face value, they will receive a higher yield because they paid less for the bond but will still receive the full face value when the bond matures. Conversely, if an investor buys a bond at a price above the face value, they will receive a lower yield because they paid more for the bond but will still receive the full face value at maturity.

Accrued interest also affects the price of a bond, particularly if the investor is buying or selling the bond before the next interest payment is due. In this case, the buyer will pay the seller the settlement price plus the accrued interest, which is the interest that has accumulated since the last interest payment.

Conclusion

In summary, face value, accrued interest, and settlement price are important terms to understand when investing in bonds. These terms can impact the return on investment and the cost of buying or selling bonds. By understanding these terms, investors can make more informed decisions when investing in bonds and potentially maximize their returns.