Factors that Determine the Bond Interest Rate

The bond interest rate that you are paid when you buy a bond is determined by a few different factors. As an investor it is important to understand how much you will be making and why. Here are a few factors that help determine the bond interest rate.

Market Interest

The interest rate of the market is one important factor that contributes to the bond interest rate. Companies try to entice investors by setting their bond rate a little higher than the market. However, you should be able to find most bonds that are issued at about the same time, in the same interest range.

Bond Ratings

The biggest factor that helps determine the interest rate that bonds pay is the bond rating system. Bonds are rated at a certain level depending on their credit history. The rankings can range from "AAA" at the best to "D" at the worst. The lower the rating, the higher the interest rate will usually be. The companies with low ratings know that they have to pay a premium in order to attract investors. When you invest in a "AAA" bond, you get a lower interest rate, but you also get the safety that comes with it. 

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