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What Is a Stated Interest Rate?

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The stated interest rate is a term used to describe the return on bonds. When a bond is issued, the stated interest rate determines how much interest will be paid based on the bond’s par value.

 

Stated Interest Rate

 

Bond Issuance

When a company issues a bond, the bond is given a par value and a stated interest rate. However, the bond may be bought or sold for a different price than the par value.

 

Calculation

To determine the amount a bond will pay you per year, multiply the stated interest rate by the par value. For example, if your bond has a par value of $500 and a stated interest rate of 7 percent, you would earn $35 per year.

 

Considerations

The purchase price of a bond will increase above the par value when the market is performing poorly, because investors will be more willing to accept a lower rate of return. Conversely, when the market is performing well, the bond prices will fall, because investors will want a higher rate of return.

 

Maturity

Bonds have a maturity period after which they will no longer continue to be paid the stated interest rate.

 

Warning

Bonds, like other loans, are not guaranteed to be repaid. You should carefully research the company before choosing to invest in a bond issue.

 

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