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CFA Level I Exam · Fixed-Income Instrument Features

Fixed-Income Instrument Basics: Bond Features Explained

Updated 7 October 2026 · Fact-checked

A bond is a contract in which an issuer borrows money and promises to pay periodic coupons and return the par value at maturity. To solve questions, identify the issuer, maturity, par value, coupon rate, coupon frequency and currency, then compute coupon per period as par × coupon rate ÷ frequency.

Understand Fixed-Income Instrument Basics

A fixed-income instrument is a loan that you, the investor, make to a borrower. The borrower is the issuer. It can be a government, a company, or a supranational body. In return, the issuer promises you set cash flows on set dates. The bond's legal terms are written in a document called the bond indenture (or trust deed). The indenture lists every feature below.

Maturity is the date the issuer must repay the principal. Tenor is the time remaining until that date. A bond issued 10 years ago with 3 years left has a tenor of 3 years. Bonds with an original maturity of one year or less are money market securities. Longer ones are capital market securities.

Par value (also called principal, face value, or maturity value) is the amount repaid at maturity. It is also the base for coupon calculations. Par value is not the market price. A bond trades at a premium if its price is above par, at a discount if below par, and at par if equal.

Coupon rate is the annual interest rate the issuer pays on par value. Coupon frequency is how many times a year it is paid: annual, semiannual, quarterly or monthly. Each payment equals the annual coupon divided by the frequency. Many US bonds pay semiannually, and many European bonds pay annually. A zero-coupon bond pays no coupon and is issued at a discount to par.

Currency denomination is the currency of the cash flows, such as USD or EUR. A dual-currency bond pays coupons in one currency and principal in another. A currency option bond lets the investor pick the currency. Currency matters because the investor bears exchange rate risk if the bond is not in their home currency.

Key formulas to remember

Coupon per period
Coupon payment = Par value × Annual coupon rate ÷ Number of payments per year
The coupon is based on par value, never on the market price.
Annual coupon
Annual coupon = Par value × Coupon rate
Divide by frequency to get each payment.
Premium or discount
Price > Par: premium. Price < Par: discount. Price = Par: par bond.
Price is usually quoted as a percentage of par.
Tenor
Tenor = Maturity date − Settlement (valuation) date
Tenor is the remaining life, not the original maturity.
Current yield (link to pricing)
Current yield = Annual coupon ÷ Bond price
Uses price, unlike coupon rate, which uses par.

How to solve Fixed-Income Instrument Basics questions

Use this order for any question on bond features. It stops you mixing up par, price and coupon.

  1. 1Read the stem and list the issuer, maturity date, par value, coupon rate, frequency and currency.
  2. 2Note what is asked: a cash flow, a feature definition, a tenor, or a premium or discount.
  3. 3For cash flows, compute the annual coupon as par × coupon rate.
  4. 4Divide the annual coupon by the frequency to get each payment, and count the number of periods as years × frequency.
  5. 5Add par value to the final coupon, since principal is repaid at maturity (for a bullet bond).
  6. 6Check the currency of each cash flow, and watch for dual-currency features.
  7. 7Eliminate options that use price instead of par, or annual coupon instead of periodic coupon.

Quickest way: Par × rate ÷ frequency

When to use it: Use when a question asks for a coupon payment, total coupons, or the final cash flow.

  1. Write par × rate ÷ frequency and compute it.
  2. Final payment = that coupon + par.
  3. Two options usually match the annual coupon or a wrong frequency. Discard those.
  4. For premium or discount, just compare price with par.

Common mistakes in Fixed-Income Instrument Basics

  • Calculating the coupon on the market price instead of par.

    Price is the number you see quoted, so it feels like the base.

    Fix: Coupon = par × coupon rate. Price only affects yield, not the coupon.

  • Paying the full annual coupon every period for a semiannual bond.

    Students forget to divide by frequency.

    Fix: Always divide the annual coupon by the number of payments per year.

  • Confusing tenor with original maturity.

    Both are described in years.

    Fix: Tenor is the time left today. Original maturity is the term at issue.

  • Treating coupon rate as the investor's return.

    The coupon rate sounds like a yield.

    Fix: Coupon rate is fixed on par. Your return depends on the price you pay, which gives the yield.

  • Forgetting that par is repaid with the last coupon.

    Students count only coupons when listing cash flows.

    Fix: For a bullet bond, the final cash flow is the last coupon plus par.

  • Ignoring the currency of a dual-currency bond.

    Students assume one currency for all cash flows.

    Fix: Check which currency pays coupons and which pays principal.

Worked examples

Example 1

A 5-year EUR bond has par value €1,000, a 6% coupon rate paid semiannually. What is each coupon payment, and what is the total cash flow at maturity?

Show the solution
  1. Annual coupon = 1,000 × 0.06 = €60.
  2. Semiannual coupon = 60 ÷ 2 = €30.
  3. Number of periods = 5 × 2 = 10.
  4. Final cash flow = last coupon + par = 30 + 1,000 = €1,030.

Answer: Each coupon is €30 and the final cash flow at maturity is €1,030.

Example 2

A bond with par value $100 pays a 4% annual coupon and is quoted at 96. What is the annual coupon payment? A. $3.84 B. $4.00 C. $4.17

Show the solution
  1. Price of 96 is below par of 100, so the bond trades at a discount. The price does not change the coupon.
  2. Coupon = par × rate = 100 × 0.04 = $4.00.
  3. $3.84 would be 96 × 0.04, which wrongly uses price. This removes A.
  4. $4.17 would be 4 ÷ 0.96, which divides by price. This removes C.

Answer: B. The annual coupon is $4.00.

Exam tips

  • Questions are three-option MCQs, so identify the trap option that uses price instead of par or ignores frequency.
  • Read whether the rate is annual and how often it is paid before calculating.
  • Know definitions precisely: indenture, tenor, par, zero-coupon, dual-currency.
  • Numerical options run smallest to largest, so check whether your answer is the annual or periodic coupon.
  • There is no penalty for wrong answers, so never leave a question blank.

Practice questions from Fixed-Income Instrument Features

Fixed-Income Instrument Basics: frequently asked questions

What is the difference between par value and market price?

Par value is the principal repaid at maturity and the base for coupons. Market price is what the bond trades for today. Price can be above, below or equal to par.

What is a bond indenture?

It is the legal contract between issuer and bondholders. It sets out the bond's features, such as maturity, coupon, covenants and any options.

Does coupon frequency change the total annual coupon?

No. The annual coupon is par × coupon rate. Frequency only changes how it is split into payments.

Why does currency denomination matter?

The currency determines the cash flows you receive. If it differs from your home currency, exchange rate movements affect your return.