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Investors can count on a fixed-income security paying them a certain amount of cash as long as the security is held until maturity and the issuer doesn’t default. Most bonds pay twice a year. A \$1,000 bond with a 10% coupon that has 10 years until it reaches maturity will pay the holder \$50 twice a year for 10 years.

But most investors are more concerned with bond yield, which measures the income a bond generates by dividing the interest by the price. If the bond sells for \$1,000, or par, the coupon payment is equal to the yield, which is 10% in this case. But bond prices fluctuate for many reasons. When they do, yield changes, too.

If market prices change and the bond’s value falls to \$800, its yield climbs to 12.5%, or \$100 divided by \$800. The semiannual coupon payment of \$50 does not change. If the bond’s price climbs to \$1,250, the yield will decrease to 8%. That’s \$100 divided by \$1,250. And it still makes two, \$50 payments a year.

## In This Series

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