If you buy a bond at face value, or par, when it is issued and hold it until it matures, you'll earn interest at the stated, or coupon, rate. For example, if you buy a 20-year $1,000 bond paying 5%, you'll earn $50 a year for 20 years. The yield, or your return on investment, will also be 5%. And you will get your $1,000 back when the 20 years are up.

You can also buy and sell bonds through a broker after their date of issue. This is known as the secondary, or resale, market. There the price fluctuates, with a bond sometimes selling at more than par value, at a premium price, and sometimes below, at a discount.

Changes in price are directly tied to the interest rate the bond pays. If its rate is higher than the rate being paid on similar bonds, buyers are willing to pay more to get the higher interest. But if its rate is lower, the bond will sell for less to attract buyers. As the price goes up, the yield, or what you earn on your investment, goes down. When the price goes down, the yield goes up.

UNDERSTANDING BOND PRICES
Corporate bond prices are quoted in increments of points and seven fractions of a point, with a par of $1,000 as the base. The value of each point is $10, and of each fraction, $1.25, as the chart shows:

So a bond quoted at 86 1/2 would be selling for $865, and one quoted at 100 3/8 would be selling for $1,003.75.

Treasury bonds and notes, in contrast, are measured in 32nds rather than in 100ths of a point. Each 1/32 equals 31.25 cents, and the fractional part of the cent is dropped when stating a price. For example, if a note is quoted at 100.2 or 100 + 2/32, the price translates to $1,000.62.

WHAT IS YIELD TO MATURITY?
The way to evaluate your return on a secondary market bond is to look at its yield to maturity. This calculation is based on the interest payments you'll receive until the time the bond matures, and what you pay for the bond above or below its par value. Your broker can tell you a bond's yield to maturity, or you can check websites specializing in bond trading.

BUYING T-BILLS
New US Treasury bills are sold weekly through an auction process. Institutional investors, like pension funds, submit written bids indicating how much they are willing to pay for the issue and how many bills they want. One fund might offer $980 for a $1,000 bill, for example, and another, $970. As an individual investor, you can submit non-competitive bids through Treasury Direct at the same time. You send a check for the total value of your bid or have the amount debited from your linked checking account: Three bills would be $3,000.

The government fills the large orders at the best price it can get, and then fills individual orders at the same price. For example, if the cut-off price is $970, all bidders at that price and higher get bills. All individual bidders get bills as well.

The difference between the check you submitted and the cost of the bill is refunded directly to your checking account. That's the interest you earn on the bill. When the bill matures, the par value is deposited in your account unless you reinvest it to buy new bills.

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