Learn what a fixed-rate bond is, how its coupon structure works, and why its market price moves when interest rates change.
A fixed-rate bond is a bond that pays a stated coupon rate that does not change over the life of the security. The investor receives predictable interest payments and principal at maturity, subject to credit risk.
Because the coupon is fixed, the bond’s price adjusts when market yields change. If new bonds are issued at higher rates, an older fixed-rate bond becomes less attractive and usually trades at a discount. If market yields fall, the same bond can trade above par.
Suppose you buy a 10-year bond with a face value of $1,000 and a 5% coupon. The bond pays $50 per year regardless of whether new bonds are later issued at 4% or 6%.
An investor says, “Because the coupon is fixed, the bond price must also stay fixed.”
Answer: No. The coupon stays fixed, but the market price can rise or fall as yields and credit conditions change.