Next video:

All bonds come with a coupon interest rate, which is the fixed annual interest a bond pays. The dollar amount, not the percentage, is fixed over time.

A bond with a \$1,000 face value and a 5% coupon rate pays \$50 in interest a year, even if its price changes. If the bond’s price climbs from \$1,000 to \$1,500, its effective yield changes from 5% to 3.33%. If it falls to \$750, its yield is 6.67%. Coupon rates are fixed; yields are not.

When market interest rates are higher than the coupon rate, the price of the bond on the open market will drop. Investors don’t want o buy a bond with a 5% yield when one with a 7% yield is available elsewhere. Less demand pushes the bond’s price down until it reaches an equilibrium price of about \$715.

If a bond has a 5% coupon and the general interest rate is 3%, investors will buy the bond to receive a bigger return. More demand makes the bond’s price climb to about \$1,666.

## In This Series

Related Articles
1. Investing

### Explaining the Coupon Rate

Coupon rate is the stated interest rate on a fixed income security.
2. Investing

### What is a "Coupon"?

In the financial world, “coupon” represents the interest rate on a bond.
3. Personal Finance

### ‘Retired’ Too Soon? How to Reenter the Workforce After 50

Here's what you need to know to survive financially and reenter the workforce when you're over 50 and a layoff has forced you to "retire" too soon.
4. Investing

### Understanding Bond Prices and Yields

Understanding this relationship can help an investor in any market.

### Using Excel PV Function to compute Bonds PV

To determine the value of a bond today - for a fixed principal (par value) to be repaid in the future at any predetermined time - we can use an Excel spreadsheet.

### Simple Math for Fixed-Coupon Corporate Bonds

A guide to help to understand the simple math behind fixed-coupon corporate bonds.
7. Investing

### An Introduction to Individual Bonds

Individual bonds are better than bond funds and can be a key component to one’s investment strategy.
8. Investing

Bonds have typically been viewed as stocks' less-glamorous sidekick, but they deserve a little more respect from investors.
Hot Definitions
1. ### Current Assets

A balance sheet account that represents the value of all assets that can reasonably expected to be converted into cash within ...
2. ### Tax Liability

The total amount of tax that an entity is legally obligated to pay to an authority as the result of the occurrence of a taxable ...
3. ### Preferred Stock

A class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares ...
4. ### Net Profit Margin

Net Margin is the ratio of net profits to revenues for a company or business segment - typically expressed as a percentage ...
5. ### Gross Margin

A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
6. ### Current Ratio

The current ratio is a liquidity ratio measuring a company's ability to pay short-term and long-term obligations, also known ...