Fixed-Rate Bond

AAA

DEFINITION of 'Fixed-Rate Bond'

A bond that pays the same amount of interest for its entire term. The benefit of owning a fixed-rate bond is that investors know with certainty how much interest they will earn and for how long. As long as the bond issuer does not default, the bondholder can predict exactly what his return on investment will be. An investor who wants to earn a guaranteed interest rate for a specified term could purchase a fixed-rate Treasury bond, corporate bond or municipal bond.

INVESTOPEDIA EXPLAINS 'Fixed-Rate Bond'

A key risk of owning fixed-rate bonds is interest rate risk, or the chance that bond interest rates will rise, making an investor’s existing bonds less valuable. For example, if Tom purchases a bond that pays a fixed rate of 5%, but interest rates increase and new bonds are being issued at 7%, Tom is no longer earning as much interest as he could be. If he wants to sell his 5% bond to invest in the new 7% bonds, he will do so at a loss, because a bond’s market price decreases when interest rates increase. The longer the fixed-rate bond’s term, the greater the risk that interest rates might rise and make the bond less valuable. If interest rates decrease to 3%, however, Tom’s 5% bond would become more valuable if he were to sell it, since a bond’s market price increases when interest rates decrease.

Tom could reduce his interest rate risk by choosing a shorter bond term. He would probably earn a lower interest rate, though, because a shorter-term fixed-rate bond will typically pay less than a longer-term fixed-rate bond. If Tom wants to hold his bond until maturity and is not considering selling it on the open market, he will not be concerned about possible fluctuations in interest rates.

RELATED TERMS
  1. Floating-Rate Note - FRN

    A note with a variable interest rate. The interest rate is usually ...
  2. Floating Rate Fund

    A mutual fund that invests in financial instruments with a variable ...
  3. Current Coupon Bond

    A bond with a coupon rate that is within 0.5\% of the current ...
  4. Variable Rate Demand Bond

    A bond with floating coupon payments that are adjusted at specific ...
  5. Flat Bond

    A debt instrument that is sold or traded without accrued interest, ...
  6. Zero-Coupon Bond

    A debt security that doesn't pay interest (a coupon) but is traded ...
RELATED FAQS
  1. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ... Read Full Answer >>
  2. Which securities are considered investment grade?

    In finance, government and private fixed income securities, such as bonds and notes, are considered investment grade if they ... Read Full Answer >>
  3. When should a company consider issuing a corporate bond vs. issuing stock?

    A company should consider issuing a corporate bond versus issuing stock after it has already exhausted all internal forms ... Read Full Answer >>
  4. How is a corporate bond taxed?

    A corporate bond is taxed through the interest earned on the bond, through capital gains or losses earned in the early sale ... Read Full Answer >>
  5. Why is Manchester United (MANU) carrying so much debt?

    The takeover of Manchester United by the Glazer family beginning in 2005 saddled the historic club with substantial amounts ... Read Full Answer >>
  6. How do I use the principles of convexity to compare bonds?

    Convexity, along with another principle known as duration, is an important consideration when assessing bond risk. All else ... Read Full Answer >>
Related Articles
  1. Bonds & Fixed Income

    Perpetual Bonds: An Overview

    A perpetual bond makes interest payments to the investor forever. This type of bond holds a certain appeal to both the issuer and buyer.
  2. Bonds & Fixed Income

    Introduction To STRIPS

    STRIPS provide an alternative form of bond for fixed-income investors who need definite cash flows at specific times. Read the article to find out how.
  3. Bonds & Fixed Income

    The Wonders Of Convertible Bonds

    Ever wondered what exactly a convertible bond does? Read the features of a convertible bond and learn how important the conversion factor is to you as an investor.
  4. Bonds & Fixed Income

    Why Companies Issue Bonds

    When companies need to raise money, issuing bonds is one way to do it. A bond functions like a loan between an investor and a corporation.
  5. Bonds & Fixed Income

    All About Zero Coupon Bonds

    Zero-coupon bonds are bonds that do not make any interest payments (which investment professionals often refer to as the "coupon") until maturity. For investors, this means that if you make an ...
  6. Bonds & Fixed Income

    Know Your Cost Basis For Bonds

    Nobody likes taxes, but tax reporting is an inevitable and unavoidable part of investing. If you buy stock, determining your costs basis is a slightly frustrating but fairly straightforward exercise. ...
  7. Bonds & Fixed Income

    Savings Bonds For Income And Safety

    Bonds offer undeniable benefits to investors, including safety and tax advantages.
  8. Mutual Funds & ETFs

    The Bond Market: A Look Back

    Find out how fixed-income investments evolved in the past century and what it means today.
  9. Mutual Funds & ETFs

    Floating-Rate Mutual Funds: Rewards And Risks

    In an economy with low interest rates, investors need to get creative in order to reap high returns.
  10. Economics

    When Global Economies Converge

    The Divergences in global economic look very much like an explanation for what happened last year, though market observers continue to tout about it.

You May Also Like

Hot Definitions
  1. Fracking

    A slang term for hydraulic fracturing. Fracking refers to the procedure of creating fractures in rocks and rock formations ...
  2. Mixed Economic System

    An economic system that features characteristics of both capitalism and socialism.
  3. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  4. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  5. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  6. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
Trading Center