Final answer:
The issuer of a bond is committed to fixed interest payments regardless of changes in market interest rates, whereas the investor's bond value can increase or decrease based on those rate changes. A fall in interest rates post-issuance makes existing bonds more valuable, while a rise makes them less valuable. Bondholders can legally seek payments, but recovery is not guaranteed.
Step-by-step explanation:
The difference between subsequent periods for the issuer and the investor lies in how interest rate changes affect the value of the bonds they are dealing with. For the issuer, once the bond is sold, the interest rate is fixed and does not change; they are obliged to pay the agreed-upon interest and principal regardless of interest rate fluctuations. Conversely, for the investor, the value of the bond in the secondary market can fluctuate based on current interest rates. If interest rates fall after the bond is issued, the investor's higher locked-in rate becomes more valuable, and the bond can sell for more than its face value. If rates rise, the bond's locked-in rate is lower compared to the new rates, making it less valuable, and the bond may sell for less than its face value. This concept is underlined by the present value calculation, which adjusts the value of future cash flows from the bond based on the current interest rates.
When a company issues bonds, for example for $10 million at an 8% annual rate, they promise to pay this rate yearly and then return the principal after the bond's maturity. Individual investors become bondholders upon purchasing bonds, and they have legal recourse should the issuer fail to make payments, though recovery is not guaranteed if the issuer's assets are insufficient. The primary concern for bondholders is the return on investment, which is subject to interest rate risk, potentially affecting the market value of the bonds they hold.