Course 101: Bond Market Interest Rates
Interest Rates and Bond Pricing
In this course
1 Introduction
2 Interest Rates and Bond Pricing
3 Bond Yields and Market Pricing
4 Bond Maturities and Interest Rates
5 Duration, Interest, and Maturity
6 Watch Bond Interest Rates Carefully

When a bond is issued, it pays a fixed rate of interest called a coupon rate until it matures. This rate is related to the current prevailing interest rates and the perceived risk of the issuer. When you sell the bond on the secondary market before it matures, the value of the bond, not the coupon, will be affected by the then-current market interest rates and the length of time to maturity.

Interest rate risk is the risk that changing interest rates will affect bond prices. When current interest rates are greater than a bond's coupon rate, the bond will sell below its face value at a discount. When interest rates are less than the coupon rate, the bond can be sold at a premium--higher than the face value. A bond's interest rate is related to the current prevailing interest rates and the perceived risk of the issuer.

Let's say you have a 10-year, $5,000 bond with a coupon rate of 5%. If interest rates go up, new bond issues might have coupon rates of 6%. This means an investor can earn more interest from buying a new bond instead of yours. This reduces your bond's value, causing you to sell it at a discounted price.

If interest rates go down, and the coupon rate of new issues falls to 4%, your bond becomes more valuable, because investors can earn more interest from buying your bond than a new issue. They may be willing to pay more than $5,000 to earn the better interest rate, allowing you to sell it for a premium.

Next: Bond Yields and Market Pricing >>


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