Fixed-rate investments use a stated interest-rate rule, but their market value, real return, credit risk, and liquidity can still change.
Fixed-rate investments are deposits, debt instruments, or insurance contracts whose interest or crediting rate is set for a stated period under the contract. “Fixed” describes how nominal cash flows are determined. It does not mean the investment has a fixed market value, is insured, cannot default, or will preserve purchasing power.
A traditional fixed-rate bond pays a stated coupon based on face value and repays principal according to its terms. Its coupon dollars are fixed, but its market price and yield to maturity change as market rates, credit quality, liquidity, and time to maturity change.
A certificate of deposit generally pays a stated rate for a term. Early withdrawal can trigger a penalty, and deposit-insurance coverage depends on the institution, ownership category, and applicable limits.
A fixed annuity is an insurance contract under which an insurer credits interest or promises payments according to stated terms. The promise depends on the insurer and contract. Surrender charges, rate-guarantee periods, renewal rates, optional benefits, and tax treatment require separate review.
A Treasury bill usually does not pay a coupon. It is issued at par or a discount and pays face value at maturity, so its return is fixed through the purchase price and maturity payment rather than periodic interest.
| Measure | What it tells you | Can it change after purchase? |
|---|---|---|
| Coupon rate | Contractual annual interest as a percentage of face value | Usually not for a conventional fixed-rate bond |
| Current yield | Annual coupon divided by current market price | Yes, when price changes |
| Yield to maturity | Discount rate equating price with scheduled cash flows, assuming stated payments and reinvestment convention | Yes, when price or assumptions change |
| Holding-period return | Actual income plus price change over the investor’s holding period | Yes; known only after the period |
| Real return | Return after the effect of inflation | Yes, because inflation is not fixed |
Calling all five measures “the rate” creates avoidable errors.
The price of a plain fixed-rate bond is the present value of its remaining coupons and principal:
where (P) is price, (C) is the coupon payment, (F) is face value, (y) is the market yield per period, and (n) is the number of remaining periods. This simplified formula assumes one coupon per period and no default or embedded option.
Assume a three-year bond has $10,000 face value and pays a 4% annual coupon, or $400 per year. If comparable market yield is also 4%, its price is $10,000.
If comparable yield rises to 5% immediately after purchase, the scheduled cash flows remain $400, $400, and $10,400, but their present value becomes:
The bond has an unrealized market loss of about $272 even though the coupon rate is unchanged. If the issuer makes every payment and the investor holds to maturity, the investor receives the scheduled coupons and face value. A sale before maturity realizes the then-current market price. The example omits accrued interest, tax, transaction costs, default risk, and reinvestment of coupons.
| Feature | Fixed-rate instrument | Floating-rate instrument | Inflation-linked bond |
|---|---|---|---|
| Payment rule | Rate set for a stated period | Rate resets to a benchmark plus or minus a spread | Principal or payment adjusts under an inflation-index rule |
| Main benefit | Predictable nominal cash-flow rule | Less coupon lag when short-term rates rise | Direct link to a specified inflation measure |
| Main risk | Inflation and market-price sensitivity | Benchmark decline, spread, cap/floor, and issuer risk | Real-yield changes, index lag, and tax or deflation details |
| Best comparison | Yield, maturity, duration, and credit | Reset frequency, benchmark, spread, and cap/floor | Real yield, reference index, and adjustment terms |
See Variable-Rate Security for the reset-rate structure.
This article provides general financial education. It does not recommend a bond, deposit, annuity, tax treatment, maturity, or portfolio allocation. Review the governing disclosure and obtain qualified advice when appropriate.