MARKET PRICES

There are many things to consider when judging a bond's market value.

The face value of a bond is known as its par.

A bond's par is its price when it is issued, which is the same price that will be repaid when the bond matures.

A bond's coupon rate is the annual percentage rate that will be paid to the owner of the bond, based on the bond's original face value.

A bond with a coupon rate of 5 percent pays 5 percent of the bond's face value each year. This interest is usually paid twice a year.

You can sell your bond on the secondary market before it reaches maturity. The price you get for the bond before it matures is known as its market price.  When the price of a bond goes above its face value, it is said to be a premium bond.  When the price is below its face value, it is known as a discount bond.

When you buy a bond on the secondary market, you are probably going to pay a price above or below the par of the bond. This will affect your yield-to-maturity, a calculation based on the bond's original purchase price, redemption value, time to maturity, coupon rate, and the time between interest payments. For example, if you buy a bond and then sell it after interest rates have risen, you will get a lower price for the bond than what you originally paid for it. The second buyer will get a higher yield than you because he or she paid less for the bond, but the buyer will still get its full par value when it matures.

Now that you understand how bonds are priced, let's discuss what costs are involved when you buy or sell bonds.