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.

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