Question
Asked Mar 9, 2020
1 views

Why do bond prices go down when interest rates go up? Don’t bond lenders like to receive high interest rates?

check_circle

Expert Answer

Introduction

Bond price plays an important role in the trading of the bond. The amount that an investor is ready to pay for the existing bond is known as bond price. The price of the bond is influenced by its interest rate.

Reason for decrease in price with increase in interest rate

The price of a bond and its interest rate have an inverse relation. The relationship of the price of a bond and its interest rate can be understood considering the zero-coupon bond. For example, a zero-coupon bond has a current market price of $956 and a face value of $1,000. The rate of return will be 4.60% (($1,000-$956)/$956). The typical condition states that the investor should be satisfied with the return of 4.60% but the investor would expect higher return due...

Want to see the full answer?

See Solution

Check out a sample Q&A here.

Want to see this answer and more?

Solutions are written by subject experts who are available 24/7. Questions are typically answered within 1 hour.*

See Solution
*Response times may vary by subject and question.

Related Finance Q&A

Find answers to questions asked by student like you
Show more Q&A
add
question_answer

Q: [EXCEL] Zero growth: Ron Santana is interested in buying the stock of First National Bank. While the...

A: Dividend = 5.65 required return = 14% No growth  Maximum price = Dividend for next period/(required ...

question_answer

Q: Oriole Corp. has been selling electrical supplies for the past 20 years. The company’s product line ...

A: Given information in question: Dividend                     =          $4.55 Required return        ...

question_answer

Q: Humberto’s Salsas is a regional manufacturer of salsa sand sauces. Humberto sells primarily through ...

A: given in question Particular Type A Type b Type c Margin $40,000 $55,000 $75,000...

question_answer

Q: [EXCEL] Preferred stock valuation: X-Centric Energy Company has issued perpetual preferred stock wit...

A: PAR VALUE 100.00 DIVIDEND RATE 4.50% DIVIDEND 4.50 REQUIRED RETURN 8.25%     H I 11 PA...

question_answer

Q: At what point during an acquisition does the acquiring firm's shareholders stand the most to gain? ...

A: The company is said to be an acquirer when it purchases more than 50% shares of the target company. ...

question_answer

Q: Consider the case of Hungry Whale Electronics Company: Hungry Whale Electronics Company is a mature...

A: Inventory Conversion Period: Average Collection Period: Payables Deferral Period: Cash Conversion...

question_answer

Q: Solve for C. (change in total monthly profit)

A: c) Change in total monthly profit if the credit is offered only to new customers while existing cust...

question_answer

Q: M&M Proposition I, without taxes, is referred to as the pie model. Explain why the size of the p...

A: MM Proposition I state that the value of the firm is not affected by its capital structure. The mode...

question_answer

Q: What must be the beta of a portfolio with E(rP) = 18%, if rf= 6% and            E(rM) = 14%?

A: Beta measures the volatility of a stock with respect to the overall market.To solve the question (to...