What Is the Interest Rate on a Bond Called?

The interest rate on a bond is called the state rate. However, your actual return will vary based on how much you pay to purchase the bond.

Features

When a bond is initially issued, the company sets a par value and stated interest rate that determine the amount of interest that the bond will accrue per year. For example, a bond with a par value of $2,000 and a stated interest rate of 8 percent will accrue $160 per year.

Function

Bonds can be traded like stocks so the price that you pay for the bond may be different than the par value of the bond. However, the interest that accrues will not change.

Calculation of Return

To calculate your rate of return, multiply the par value by the stated interest rate by 100 and divide the result by the amount you paid for the bond. For example, if you paid $1,900 for a bond with a par value of $2,000 and a stated interest rate of 8 percent, your return would be 8.42 percent.

Considerations

When interest rates are rising, the price of bonds will fall to make the actual return on the bond higher. When interest rates fall, the price of bonds goes up.

Warning

Check the bond rating before investing because some bonds are much more risky than others.

References

• Investopedia: Advanced Bond Concepts: Yield and Bond Price
• Investopedia: The ABCs of the Bond Market