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 income. 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 dollars and cents, as stock prices are. But the decimal prices often reflect the traditional pricing, which was 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 here shows. So you might be more apt to find bonds quoted at $96.50 or $99.875, for example, than at $96.40 or $99.30.

Treasury bonds and notes, in contrast, are quoted in 32nds 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, such as www.investinginbonds.com. You can also find information on bond prices on the NASD website, at www.nasd.com.

The current market price of a bond, which may be higher or lower than its par value of $1,000, affects the current yield though not the dollar amount of the interest a bondholder receives. If the price is higher than par, or selling at a premium, the yield is lower than the stated interest rate. If the price is lower than par, or selling at a discount, the yield is higher than the stated rate. Sometimes the differences are small, but they can be quite dramatic.

BUYING T-BILLS
New US Treasury bills are sold weekly through an auction process. Institutional investors, including pension funds and mutual funds, submit written bids indicating the interest rate they are willing to accept for the issue and how many bills they want. One fund might bid 2.205%, for example, and another, 2.210%, and a third, 2.220%. As an individual investor, you can submit noncompetitive bids through Treasury Direct at the same time. You have the amount debited from your linked checking account or you could send a check for the total value of your bid. For example, you might commit $10,000 to buy as many T-bills as that amount would cover.

The government fills the competitive orders at the best rate it can get, and then fills individual orders. For example, if the cut-off bid is 2.15%, all bidders at that rate and lower get bills. All individual bidders get bills as well.

When the bill matures, par value of $1,000 per bill, which is always more than you paid to buy, is deposited in your account unless you reinvest it to buy new bills.

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