Why are bond prices inversely related to interest rates ?
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Answer Posted / 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...
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