How the bond system works

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The Independent Online
BONDS are issued at a fixed price, which is how the company or government raises cash as a loan from investors. In return the issuer pays investors a fixed interest rate, known as the coupon rate, every year until the bond matures. At which point investors get back their original capital.

Between these dates, the bonds can be bought and sold on the markets. The price moves up and down in line with interest rates.

When interest rates rise, the price of a bond goes down because its coupon rate becomes less attractive than newer bonds issued when rates are higher.

If rates fall, the bond's coupon rate becomes more attractive to investors, which drives up the capital value of the bond on the open market.

The longer a bond has to go until maturity, the more it is affected by rate movements as no one can predict what will happen in the long term.