The interest rate a bond pays is a measure of its value. In one way, the higher the rate a bond pays, the more the bond is worth as an investment since it provides proportionally greater income. And since a bond pays the same rate for its full term, or until it is
called,
or redeemed by the issuer, buying high-paying bonds locks in long-term income. Additionally, an investor could potentially profit from selling a high-paying bond when rates drop.
At the same time, rates on newly issued bonds that are much higher than the average being offered on other bonds with the same term is a danger sign, since only the riskiest bonds must pay higher than market rates to attract buyers.
Unlike stocks, where share prices of comparable companies can differ dramatically, interest rates on bonds issued by comparable companies at about the same time often vary by only fractions of a percentage point — depending on the type of bond, the length of a bond's
term,
and its credit rating.
Alexandra Lebenthal, President and Chief
Executive Officer of
Alexandra &
James, Inc.
Alexandra Lebenthal, President and Chief
