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

what is the difference between durable and nondurable goodsdiscounting of bills meaningdisadvantages of global trademeaning of crossing of chequewhat is direct and indirect quotationwhat is horizontal mergerdifference between a qualified and unqualified audit reportstrengths and weaknesses of market economyservices rendered accounting entryexamples of diminishing returnslimitation of barter systemdual aspect concept of accounting with examplesadvantages and disadvantages of jitdistinguish between cost accounting and management accountingis nigeria a mixed economypositives of urbanisationwhat is the difference between direct cost and indirect costvertical analysis of a balance sheetdifference between account receivable and account payableunearned rent revenueup selling examplesadvantages of jit productionwhat is capm in financedirect quote exchange ratemarket penetration advantages and disadvantageslearn bank reconciliation statementaccounting entry for prepaid insurancewhat is a floating currencywhat are crossed chequeshow to prepare fund flow statement from balance sheetrent revenue journal entryadvantages and disadvantages of electronic bankingwhat is the definition of current liabilitieseconomic growth advantages and disadvantagesmerit and demerit of deregulationvertical merger companiesjournal entry for prepaid rentbearer cheque and order cheque meansdefine current assets and current liabilitieswhat is derivative marketmarket segmentation disadvantagesidentify the advantages and disadvantages of a command economydisadvantages of target marketingmixed economy advantageswhat is conglomerate integrationadjusting entries for interestdifference between bills receivable and accounts receivabledefinition of unsystematic riskhow is crr calculatedadvantages and disadvantages of population growth essayadvantages of cashless policyconglomerate company definitiontypes of agro based industriesskimming pricing strategiesadvantages and disadvantages of importingmarketing skimming pricingdifference between process costing and job costingwhat is the difference between direct cost and indirect costjit production advantages and disadvantagesoperating cash flow ratio formulanationalisation advantages and disadvantagesbenefits of merging companieshorizontal merger and acquisitioncash flow statement wikipediasalary payable journal entryunitary demand exampledifference between trading account and demat accountconglomerate growthadvantages of evmfull form of bhelventure capitalist advantages