Question

Explain the relationship between interest rates and bond value. What makes interest rates change? Is it possible to lose money if you invest in bonds, even federal government bonds? Why or why not?

Answer 1

There is an inverse relationship between interest rates and bond value. The relationship explains that if the interest rate increases, bond value will decrease and vice versa.

Interest rate can be changed due to changes in demand and supply of money, inflation rates, government policies and economics conditions.

Bonds are debt securities and often secured by the issuer. However, if the issuer goes bankrupt, it is very difficult for the bond buyers to recover the money, so yes, the bondholder can lose the money. The deferral government bond can also default if the government is facing an acute financial crisis and not in a position to repay.

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