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Let’s assume that you are a bond investor. Why do bond prices go down when interest...

Let’s assume that you are a bond investor. Why do bond prices go down when interest rates go up? Don’t you like to receive higher interest rates? (LO 10-2)

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Answer #1

The bond prices go down when interest rates go up because higher interest rates imply higher risk in the bond. Higher the risk lower will be the bond price. Also, the demand for our bond goes down because of the higher interest rate. Lower demand pushes the bond prices down.

So, the bond prices are inversely proportional to the interest rates.

Yes we would likt to receive higher interest rates, but the interest is constant throught the maturity of the bond in the form of coupon payments. It is because of this reason, the price of our bonds go down when the market interst rates go up. The other bonds with higher interst rates will be more attractive and the demand for the newly issued bonds go up.

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