Question
What is the relationship between interest rates and bond prices?
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17th Nov 2009 by Joseph Pousada
The relationship between interest rates and bond prices generally is an inverse relationship. A bond is issued at par $1000 and pays a rate of 6 percent. If six months later the market rate of interest for the same class of bonds is 7 percent a person selling the original bond that was issued at the 6 percent rate would need to sell the bond at a discount to the par value to make up for the 1 percent difference. If one year later the prevailing market rate of interest for the same class of bonds drops to 4 percent, the same holder of the bond that was issued at 6 percent can sell the bond at a premium to par value because it is paying at a higher rate than the current market rate.
The relationship between interest rates and bond prices generally is an inverse relationship. A bond is issued at par $1000 and pays a rate of 6 percent. If six months later the market rate of interest for the same class of bonds is 7 percent a person selling the original bond that was issued at the 6 percent rate would need to sell the bond at a discount to the par value to make up for the 1 percent difference. If one year later the prevailing market rate of interest for the same class of bonds drops to 4 percent, the same holder of the bond that was issued at 6 percent can sell the bond at a premium to par value because it is paying at a higher rate than the current market rate.
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1st Nov 2009 In Bonds
1 Answers | 40 Views
Subjects: bond prices,
interest rates,