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Key Takeaways. Most bonds pay a fixed interest rate that becomes more attractive if interest rates fall, driving up demand and the price of the bond. Conversely, if interest rates rise, investors will no longer prefer the lower fixed interest rate paid by a bond, resulting in a decline in its price.
Including bonds in your investment mix makes sense even when interest rates may be rising. Bonds' interest component, a key aspect of total return, can help cushion price declines resulting from increasing interest rates.
When rates go up, bond prices typically go down, and when interest rates decline, bond prices typically rise. This is a fundamental principle of bond investing, which leaves investors exposed to interest rate risk?the risk that an investment's value will fluctuate due to changes in interest rates.
By multiplying the bond's face value by its coupon interest rate, you can figure out what the dollar amount of that interest rate is each year. For example, if the bond's face value is $1000, and the interest rate is 5%, by multiplying 5% by $1000, you can find out exactly how much money you will receive each year.