When you buy a bond you are essentially loaning your money to the organization that is taking the money, commonly known as the borrower. In exchange, the borrower promises to pay you interest every year and to return your principal at "maturity," when the loan comes due, or at "call" if the bond is of the type that can be called earlier than its maturity. The length of time to maturity is called the "term."

A bond's face value, or price at issue, is known as its "par value." Its interest payment is known as its "coupon."

So here are your terms to understand and then I'll give you an example of how they tie together.
Issuer or Borrower: The organization that accepts your money with a promise to pay it back.
Principal: The initial amount you loan to the borrower that needs to be repaid.
Interest/Coupon: The dollar amount of the loan that is paid over and above the principal.
Yield: The coupon amount divided by the current price of the bond.
Maturity: When the loan is over, due date or the end of the term.
Term: How long the loan is good for before it needs to be fully paid back.
Face Value/Par Value: The price of the bond when it was issued.

A $1,000 bond paying 7 percent a year has a $70 coupon, generally paid out twice a year for $35.00 on each payment. Expressed another way, its "coupon rate" is 7 percent. If you buy the bond for $1,000 and hold it to maturity, the "yield," or actual earnings on your investment, is also 7 percent (coupon rate divided by price = yield).

What makes bonds attractive for so many investors is that the coupon rate for the bond you purchase does not change, it is a fixed amount of income you can depend on. This simple premise is also what makes bond investing a bit crazy at times.

Since the prices of bonds fluctuate throughout the trading day, so do their yields. But remember the coupon payments stay the same.

Say you don't buy the bond right at the offering, and instead buy from somebody else in the "secondary" market. If you buy the bond for $1,100 in the secondary market (you buy the bond much like you would a stock, directly through your broker), the coupon will still be $70, but the yield is now 6.4 percent because you paid a "premium" for the bond.

In the original example the coupon rate of $70.00 was divided by the cost of the bond or $1,000.00 for a 7.00% yield.
In the current example the coupon rate of $70.00 is divided by the cost of the bond or $1,100 for a 6.4% yield.

For a similar reason, if you buy it for $900, its yield will be 7.8 percent because you bought the bond at a "discount." If its current price equals its face value, the bond is said to be selling at "par."

The bottom line: There are many ways of expressing a bond's return, but "total return" is the only one that really matters. This includes all the money you earn off the bond: the annual interest and the gain or loss in market value, if any.

If you sell that $1,000 bond with the $70 coupon for $1,050 after one year, your total return is $120, or 12 percent -- $70 in interest and $50 in capital gains. (Prices are usually expressed based on a par value of 100, so when you sell that bond for $1,050 the price would be quoted as 105.)

In the next installment, I'll cover some of the factors that might make a bond increase or decrease in value.