Learn the stock market › Funds, ETFs and bonds › Lesson 4 of 7
What is a bond?
A loan you can sell
The US Treasury borrows by selling bills, notes and bonds; companies and cities borrow the same way. The SEC describes the deal: the issuer pays a set rate of interest for the life of the bond and repays the principal, also called face value or par, when it matures. Before then, the bond can be sold to someone else.
A bond has three parts:
- Face value: what is repaid at maturity, here $1,000.
- Coupon rate: the yearly interest, figured on the face value. 3% pays $30 a year.
- Maturity: how long until it is repaid.
Why the price changes
The coupon is fixed. If new loans pay 4%, nobody will pay $1,000 for your 3% bond, so its price falls until a buyer earns about 4% anyway. When rates fall, it works the other way. Here is a bond with a 3% coupon at different market rates, with 2 and 10 years left.
| Market rate | 2 years left | 10 years left |
|---|---|---|
| 1% | $1,039 (+3.9%) | $1,189 (+18.9%) |
| 2% | $1,019 (+1.9%) | $1,090 (+9.0%) |
| 3% | $1,000 (0.0%) | $1,000 (0.0%) |
| 4% | $981 (−1.9%) | $919 (−8.1%) |
| 5% | $963 (−3.7%) | $846 (−15.4%) |
With 2 years left the price fell 1.9% when rates rose to 4%, with 10 years left 8.1%. The longer you are stuck with the old rate, the further the price moves. Hold the bond to maturity and you still get the face value back, as long as the borrower can pay.
Work it out
This example pays interest once a year to keep the sum short; Treasury notes and bonds pay every six months. Enter the market rate on loans as long as the bond.
Enter today's rate on loans as long as the bond.
Two risks
Rates. Shown above: prices fall when rates rise, most for long bonds.
Default. A company can fail to pay. That is why lending to a riskier company pays a higher rate than lending to the government.
Bond funds own many bonds, so the same applies to them. How rates affect stocks is in the lesson on interest rates and the stock market.
Test yourself
You own a bond paying 2%. Rates on new loans rise to 5%. What happens to its price if you want to sell?
Source
- US Securities and Exchange Commission, Bonds, read on 5 November 2026.