Bond Interest Rates

A bond's interest rate is competitive, meaning it is comparable to the rates of other bonds of similar quality being sold at the time. The rate the bond pays at issue generally remains the same until maturity. However, interest rates of new bonds entering the market fluctuate regularly based on changing economic forces, like inflation and consumer demand.

Changes in interest rates directly influence existing bond prices. In general, when interest rates rise and new bond issues offer a higher rate than the one you already own, your bond will be worth less than par value if you sell it before maturity. But, if the new bonds are paying a lower rate, your bond will generally sell for more than par. The general rule is that bond prices fall when interest rates go up, and they rise when interest rates go down.

For example, if you buy a bond with an interest rate of 6% and interest rates increase to 8%, you might consider selling your bond in the secondary market and buy a new bond to take advantage of the higher rate. However, investors are unlikely to pay full face value for a bond paying a lower rate than would be available with a new issue. Thus, you may have to sell your bond at a discount to par value to entice an investor to purchase your bond.

Depending on how deep the discount, all the interest you'd gained may be offset by your loss of principal.

On the other hand, if interest rates drop to 4%, other consumers might be willing to pay more for your bond, which still pays 6%. In this case, you may offer it at a premium to par value, and receive more money than what you originally paid. The amount of the premium, and the interest payments you've received, will leave you with a profit.

For a list of composite bond rates including maturities and yields for U.S. Treasury, municipal and corporate bonds, visit Scottrade's Bonds Center.

Bond Quotes

Bond pricing is quoted as a percentage of face value. For example, if the quote is 87.5, the bond is selling for 87.5% of its face value. For a $1,000 corporate bond, the price would be $875.