When you buy bonds, you are loaning money to the Issuer. Since a bond is a loan, the interest paid the holder of the payment for lending money. The interest To be paid is determined as a percentage of the loan amount, called the par value of the bond.
As a result, a bond with a par value of $1000 and an interest rate of 10 percent, promises to pay $100 a year in interest until maturity, at which point the initial face value ($1,000) is returned to the bondholder.
What happens when interest rates rise (or fall)
Although the bonds have a fixed nominal value, the price at which it is bought and sold on the financial market may be above, below or equal to the nominal value. For example, if the market interest rate is 10 percent, the bonds pay 10 percent of the shares will be sold at face value. However, if the market interest rate will rise by 11 percent, nobody will pay face value, because identical bonds that pay 11 percent of the available.
In this case, the bond price will fall to interest expense plus the increase in earned the difference between the nominal value and the lower price paid gives an 11 percent profit.
For the same reason, when market interest rate falls, bond prices will increase. This scenario demonstrates the basic principle between interest rates and bond prices; when one goes up the other goes down. Because market interest rates fall and continue to grow, so bond prices.
There is a nominal cost to change?
It is important to note that the nominal value of the bonds, the amount you will receive at maturity, will never change, regardless of market interest rates and rates bonds.
If the market interest rate is higher than the interest paid on the bonds, the bonds is selling at a discount (below face value). If the market interest rate is lower than the interest paid on the bonds, he said, to be sold at a premium (above face value). And if the market interest rate is equal to the payment of interest, bonds will sell at face value. Itself nominal value, and thus, the value of the bond is paid at maturity, will never change, regardless of the price of a bond or interest rates in the market.
(For further reading on this issue, please visit our Tutorial the basics of bond.)