Relationship between Bond Prices and Interest Rates

A bond can be defined as a debt security which is issued by a company. The holder of a bond is called bondholder who is entitled for interest and principal repayment at the time of the maturity of the bond. So for example if an individual purchases a 7 percent, 8 year bond then he or she will get 7 percent annually as interest rate payments and after 8 year he or she will get the principal amount back.

While investing in bonds it is important to look at interest rates, if one intends to hold the bond till maturity then the value the bond does not change because of change in interest rates. However if one intends to sell bond before maturity then he or she should look at the relationship between bond prices and interest rates, because bond prices have an inverse relation with interest rates.

Therefore whenever interest rates go up then the price of bond will fall and when interest rates falls then the price of bond will rise. So if one expects the interest rates to go down then he or she should buy the bond as interest rates on other fixed yielding securities will go down with falling interest rates. However if one excepts the interest rates to rise then he or she should sell the bond as one can better return by investing in other fixed yielding securities.

0 comments… add one

Leave a Comment

Related pages

forex reserves of countriesmarket skimming pricing exampleexplain traditional economysubstitution and income effect examplesbartering systemmerits and demerits of line organisationreal nominal personal accounts rulesconglomerate diversification strategy examplessystematic and unsystematic risksaccounting concept going concerndefine demand deposit accountskimming marketdisadvantages of break even analysiswhat is horizontal and vertical analysisdirect quotation indirect quotationadvantages and disadvantages of marginal costingdifference between import tariff and import quotamateriality principleaccounts receivable securitizationexamples of income effectbenefits of dematerialisationconvertible and non convertible preference sharesfifo advantagesvertical mergerconsignees definitionwhat is full form of ipowhat are examples of inferior goodsslr and crrdefine normal good in economicsdisinflation refers to a situation wheredifferent types of crossing of chequesdisadvantage of oligopolydifference between inferior and normal goodswhat is current assets and current liabilities with exampleprofit skimmingcapital account convertibility pptmarginal costing systemautocratic leadership businessadvantages of currency depreciationentry for salary payablehorizontal analysis in accountingadvantages and disadvantages of financial statementdifference between personal real and nominal accountsdistinguish between job costing and process costingdebit the giverfull form of sensexassumption of capm modelauthoritarian leadership advantagesexamples of conglomerate diversificationfund flow and cash flow statementadvantages of socialist economyprepaid rent expense journal entryfii meaninglaw of diminishing returns economics exampledefinition of proprietorswhat is dishonour of billadvantages and disadvantages of duopolycompare and contrast a tariff and a quotalimitations of capital budgetingwhat is trial balance in hindicurrent liabilities examples in accountingwhat is marginal costing in cost accountingdefinition cost push inflationdefine privatisationshareholding meaningdifference between term loan and overdraftbarter system meaningadvantages and disadvantages of electronic bankingwhat is the meaning of cross chequeecs in bankingdefine conglomerate integrationconsignor and consigneethe advantages of federalismmarketing skimmingmeaning of trial balancehow to calculate cross currency rates