Bonds are also known as fixed-income securities because the income that they generate each year is set. Some investors buy bonds primarily for the stability of this income stream, while others buy and sell bonds similar to the way they might buy and sell stocks.

If you trade bonds, you'll be aware that while the interest a bond pays remains fixed, its market value changes over time. Sometimes it sells for more than its face value, or par, which is usually $1,000, and sometimes it sells for less than face value. That may happen for several reasons, including:

• Interest rates may go up after a bond is issued, driving its price down. That happens because investors are willing to pay less than face value for bonds paying less than the current interest rate.
• Conversely, interest rates may go down, which means existing bond prices will go up. That happens because investors are willing to pay more than face value for bonds paying more than the current interest rate.
• The bond's rating is reduced because the issuer is having financial problems, and so its price falls below face value because investors are taking more risk in buying it.

Of course, if you hold onto a bond from the date of issue to the date of maturity, changing market prices don't affect you.