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Interest Rates and Bond Prices

Interest Rates and Bond Prices

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Published by kirang gandhi
Interest Rates and Bond Prices
Interest Rates and Bond Prices

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Categories:Types, Business/Law
Published by: kirang gandhi on May 15, 2013
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Interest Rates and Bond Prices Once a bond is issued the issuing corporation must pay to the bondholders the bond’s stated interest for the life of the bond. While the bond’s stated interest rate will not change, the market interest rate will be constantly changing due to global events, perceptions about inflation, and many other factors which occur both inside and outside of the corporation. The following terms are often used to mean interest rate:
• • • •

effective interest rate yield to maturity discount rate desired rate

When Interest Rates Increase Interest rates are likely to increase when bond investors believe that inflation will occur. As a result, bond investors will demand to earn higher interest rates. The investors fear that when their bond investment matures, they will be repaid with Rupees of significantly less purchasing power. When Interest Rates Decrease Interest rates are likely to decrease when there is a slowdown in economic activity. In other words, the loss of purchasing power due to inflation is reduced and therefore the risk of owning a bond is reduced Relationship Between Interest Rates and a Bond’s Market Value As we had seen, the market value of an existing bond will move in the opposite direction of the change in market interest rates.
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When market interest rates increase, the market value of an existing bond decreases. When market interest rates decrease, the market value of an existing bond increases. The relationship between market interest rates and the market value of a bond is referred to as an inverse relationship. Perhaps you have heard or read financial news that stated “Bond prices and bond yields move in opposite directions” or “Bond prices rallied, lowering their yield...” or “The rise in interest rates caused the price of bonds to fall.”

If you were the treasurer of a large corporation and could predict interest rates, you would...

Issue bonds prior to market interest rates increasing in order to lock-in smaller interest payments.

If you were an investor and could predict interest rates, you would...

Purchase bonds prior to market interest rates dropping. You would do this in order to receive the relatively high current interest amounts for the life of the bonds. (However, be aware that bonds are often callable by the issuer.) Sell bonds that you own before market interest rates rise. You would do this because you don’t want to be locked-in to your bond’s current interest amounts when higher rates and amounts will be available soon.



Because of the interest rate risk, bonds with longer terms are more risky than bonds with shorter terms. If you plan to trade bonds, be sure you understand the interest rate risks involved and how holding long-term bonds increases that risk.

Note : Meeting priority to appt only

For Further Details kindly Contact:

Thanks and Regards, Kirang Gandhi Independent Financial Planner www.fpindia.in M- 9028142155

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