A bond is a debt security that obligates the issuer, for example a corporate borrower, to make coupon payments for the life of the bond as well as payment of face value to the investor (the bondholder) at maturity. Because these payments to the investor are set to occur in the future, they must be discounted to the present to get the value of all the cash flows to be received. As market rates increase, bond prices must therefore decrease because the future payments are discounted at a higher rate to determine the value of the bond. In addition, because bonds issued by corporations are not riskless, the discount rate applied to each corporate borrower will embody an additional premium to compensate the investor for liquidity risk, default risk, call risk.
