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Bonds are debt instruments. In other words, they are loans. One party lends money to another in exchange for interest and a return of the investment principal after a specified period of time. This specified period of time is called the maturity of the bond.Bonds have a fixed interest payment on the face value of the bond, when the bond pays, it will pay the stated interest rate on the bond contract until maturity. Typically the face value of a bond is $1000 so a Bond with a 5% coupon ratewill pay 5% of $1000 or $50 per year. But if the overall market interest rate falls to say 4% a 5% bond would be a great deal so the seller of the 5% bond can charge more (a premium). In this case the bond in order for the bond to yield 4% itwould have tosell for $1250 because $1250 times 4% is $50.A bonds price and interest rate are inversely correlated. This means that asinterest ratesfall, bond prices rise and as interest rates rise bond prices fall.