The payment structure of a corporate bond is best thought of as
To understand the payment structure of a corporate bond, it is important to grasp the concept of bond cash flows. Corporate bonds are debt instruments issued by companies to borrow money from investors. The payment structure involves two main components: coupon payments and face value repayment.
1. Coupon Payments: This refers to regular interest payments made by the issuing company to bondholders, typically on a semi-annual or annual basis. The coupon rate is usually fixed at the time of issuance and expressed as a percentage of the bond's face value. For example, if the face value of a corporate bond is $1,000 and the coupon rate is 5%, the company will make coupon payments of $50 annually (5% of $1,000) or $25 semi-annually.
To calculate the coupon payment amount, multiply the face value of the bond by the coupon rate. For example, $1,000 (face value) x 0.05 (coupon rate) = $50 (annual coupon payment).
2. Face Value Repayment: At maturity, which is the end of the bond's term, the issuing company repays the bondholder the face value of the bond. This is the original amount borrowed by the company. For instance, if the face value of the bond is $1,000, the investor will receive $1,000 upon maturity.
To grasp the payment structure of a corporate bond, analyze the coupon payments made throughout the bond's term and the face value repayment at maturity. Keep in mind that corporate bond pricing factors in the credit quality of the issuing company, prevailing interest rates, and other market conditions.