Definition: What are Bond Interest Rates?
A bond is essentially a type of loan between an investor and a company, government or other organization. A bond interest rate refers to the amount that the issuer of a bond will later pay back to an investor in return for having loaned them money in the amount of the bond.
Just like when you walk into a bank to borrow money, there is an interest rate assigned to that loan. Bond interest rates tell you how much money you’ll make for loaning the bond issuer your money.
What Impacts a Bond’s Interest Rate?
Bond interest rates are impacted by many different factors.
First, the body offering the bond plays a role. Typically speaking, a very stable organization such as the U.S. government will offer bonds with very low interest rates, because there is very little chance of them defaulting on the bond.
A younger corporation, or some less stable foreign governments, may have to offer higher interest rates to get investors to lend them money in order to compensate for the increased risk of default.
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Bond interest rates are one of the primary characteristics of a bond that an investor should look at before purchasing. Often, the interest rate on the bond is referred to as the ‘coupon’ value.
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