The key distinction is between two different types of "interest":
Coupon rate (the actual interest paid by the bond issuer) → This is fixed when the bond is issued and never changes during the bond's life. The issuer pays the same dollar amount of interest each year (or semi-annually), based on the bond's face value (par value). For example, a $1,000 bond with a 5% coupon rate always pays $50 per year, no matter what happens to the bond's market price.
Yield (the effective interest rate or return for a new buyer) → This is not fixed. It changes constantly based on the bond's current market price. Yield and price have an inverse relationship:
When the bond price goes up, the yield goes down.
When the bond price goes down, the yield goes up.
The coupon payment stays the same, but the price you pay to buy the bond changes. So the effective return (yield) adjusts accordingly.
Example:
Bond face value: $1,000
Coupon rate: 5% → Fixed interest paid: $50/year
If you buy it at $1,000 (par) → Yield = 5%
If you buy it at $1,100 (premium) → Yield ≈ 4.55% (same $50 / higher price = lower yield)
If you buy it at $900 (discount) → Yield ≈ 5.56% (same $50 / lower price = higher yield)
In short:
The interest paid (coupon) is fixed forever.
The interest rate you earn (yield) is variable and moves inversely with the bond's market price.
This is why bond prices fluctuate in the secondary market — to make the yield competitive with current interest rates and other investments.
in your example: a 1000$ bond with a 5% coupon rate. Assume I buy that bond at 1000$ and I receive 50$ a year. The risk I take is that the price of the bond may go down. So if the price goes down to 800$ and I sell the bond after 1 year I lose 200$ and gain 50$, right?
Yes, exactly — that's a very good way to think about it!
Let's break down your example clearly:
You buy a $1,000 face value bond with a 5% coupon rate → you pay $1,000 today.
Every year the issuer pays you $50 in interest (the coupon payment).
After 1 year, you receive $50 cash interest.
Scenario: Bond price falls to $800 after 1 year, and you decide to sell it.
What happens to you financially?
You receive:
+$50 (coupon interest paid during the year)
+$800 (what you get when you sell the bond)
You originally paid: $1,000
Net result after 1 year:
+$50 (interest) + $800 (sale proceeds) − $1,000 (what you paid) = −$150
So yes:
You gain $50 from the coupon, but you lose $200 in capital (because you sell for $800 instead of the $1,000 you paid), for a net loss of $150 over that year.
This is called interest rate risk or price risk — the main risk for bondholders who might need to sell before maturity.
If you hold the bond to maturity, the price fluctuations in the meantime don't matter: you still get $50 per year + $1,000 back at the end (assuming no default).
But if you sell early and the price has fallen (usually because market interest rates have risen), you realize a capital loss.
So your understanding is spot on:
Coupon income + capital gain/loss = your total return when you sell before maturity. In this case, the capital loss outweighs the coupon income, leading to an overall loss on the investment for that period.