A bond is basically an IOU. Government and Corporations issue bonds to gain money, in exchange to promise to pay interest to the purchasers of the bonds. This is a safer method to save and grow your money, then buying stocks. or mutual funds. Bonds will pay a certain amount of interest that's predetermined. This ensures that the bond value will not decrease in value , like a stock will, if the market is soft, or the company is not doing so well.
Government bonds are sold to investors to help in the cost of running the government. Corporate bonds are sold to gain funds to grow the company, or to pay off debt. Both types agree to pay a certain interest payment to the purchaser.
Bonds are traded the same way regular stocks and money markets are traded, and the prices will vary just the same. Bond prices can be confusing because its very rare that the bond purchase to find the bond selling price, but it is important that the investor understands why the prices vary.
When a bond is sold, it is sold at a face value. This is the amount that bond holder is entitled to at the time of maturity. This face value does not include the coupon rate which is the amount of interest the bond will pay over the life of the bond. Fir instance if the Bond face value is $1000, and the coupon rate is 6 percent, the bond holder will receive $60 per year
Its important to know the difference between face value, and the price of the bond. Just like stocks, bonds on traded the same way. You can determine the selling price of a bond the same way as a stock. Newspapers, or online will list the selling price. If you see a figure such as , 9.500 next to a bond. (assuming the face value is $1000), this means the bond is selling at $950, or $500 less then its face value.
The coupon rate or the amount of interest that is paid is an important factor in the price, The higher the coupon rate the better the investment,. If the coupon rate tends to be lower the average interest rate, its a riskier investment. The higher the coupon rate the better the possibilities are that the bond prices will be rise making it a better investment.