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Investors can buy a bond:
- When it’s first issued
- In the secondary market
The secondary market is where investors buy and sell bonds from each other, not from the issuer.
When a bond is first issued, the interest rate it pays depends on a number of factors:
- The economic climate at the time it’s issued
- The type of entity that issued the bonds
- The financial well-being of the bond issuer
- What interest rate will attract investors
The interest rate on a bond stays the same until the maturity date, but its value goes up and down in the secondary market.
The price of a bond in the secondary market depends on how its interest rate compares to similar bonds being issued for the first time. If the bond you own pays interest equal to the interest rate on a new bond of comparable quality, your bond will have a price equal to its face value. If the interest rate on your bond is less than the interest rate on a newly issued bond, your bond is less desirable. You must sell it at a discounted price. If the interest rate on your bond is more than the interest rate on a newly issued bond, your bond is more desirable and will sell at a premium.
For example, if you own a $5,000 bond paying 5 percent and interest rates drop to 4 percent, the value of your bond increases and you can sell it for more than the face value. However, if interest rates rise higher than 5 percent, your bond’s value decreases and you’ll need to sell it at a discount from the face value.
Types of Bonds >> |
