Why are bond prices inversely related to interest rates ?
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Answer / sivaguru g
As the interest rate increases the price value of bond
decreases. This is due to increase in interest rate
encourage the investors in investing Bank deposits over
which they get return with very minimal risk. Hence the
demand for Bond will come down which leads to decrease in
bond price.
| Is This Answer Correct ? | 24 Yes | 5 No |
Answer / sharad kakkar
suppose the market interest rate is 5%....
u take a bond at this interest for 1000$......
suppose the market interest goes up to 7%
now the value(price) of yr bond will go down as it will be more profitable for ppl to invest in current new bonds @7%, so the market value of yr bond bought at 1000 $ will go down......
| Is This Answer Correct ? | 11 Yes | 0 No |
Answer / vidit johri
bond prices = p.v of (coupon payments + redemption value)
the above payments are discounted by current
interest rates...
eg if roi is 5 % then the coupon payment due after 1yr
would b C.P/(1+.05)
SO if rates increase to 7% then the picture wud b
C.P/(1+.07)
hence the PRESENT VALUE OF THE BOND DECREASES....
THEREFORE THEY ARE INVERSELY PROPOTIONAL...
| Is This Answer Correct ? | 4 Yes | 1 No |
Answer / shobhit gupta
when interest rate increes then bond price inversely
because when interest rate will be incress then public
invest in bank and get return more then bond whith less
risk and no one in the market for buying bond .
| Is This Answer Correct ? | 3 Yes | 1 No |
Answer / nagasarada
At first glance, the inverse relationship between interest
rates and bond prices seems somewhat illogical, but upon
closer examination, it makes sense. An easy way to grasp
why bond prices move opposite to interest rates is to
consider zero-coupon bonds, which don't pay coupons but
derive their value from the difference between the purchase
price and the par value paid at maturity.
| Is This Answer Correct ? | 0 Yes | 3 No |
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