Bonds traded on secondary market

• After they are issued, bonds trade in the secondary market on the various exchanges in which they are listed.
  
  

Interest-Rate Sensitive

• Bonds are interest-rate sensitive investment vehicles. When interest rises, the price of bonds generally drops. When interest rates drop, the prices of bonds generally rise.
  
  

Adjustment of Yields

• Since bonds carry a fixed interest rate, the only way their yields can be made competitive with that of other comparable fixed-income investments is for their price to be adjusted.
  
  

Bond Yield

• Bond yield is a percentage measure of an investor's annual rate of return. Yield is determined by dividing the annual interest received by the price paid for the bond, expressed as either a percentage above or below its original par value.
  
  

Below Par

• In order for a previously issued bond to generate a higher yield in a rising interest rate environment, it must be offered at a price below its par value. Bonds that sell below their par value in the secondary market are sold at a discount.
  
  

Above Par

• If interest rates decline, the price of a previously issued bond will sell at a premium to its par value. By paying a premium, or a price above par ($1,000), the yield on the bond will drop.