How Interest Rates Affect the Price of Bonds, Descriptions, Rates and Prices, Maturity, Considerations

When you buy a bond savings with us or a deposit certificate (CD), your goal is to put your money in which you earn interest. Investors will buy talked bonds for the same reason. However, there is one important difference. The price of a changed bond changes as it is exchanged in the bond market. The most important factor affecting the price of a bond is the current interest rate. The value of the bond market has an opposite relationship with current interest rates. That is, if interest rates rise, bond prices tend to fall and vice versa.

Description

 Description

Bonds are securities in debt issued by companies and governments to borrow money. A bond pays a fixed annual interest rate called the coupon rate until the due date, when the money should be returned. When bonds are issued, the coupon rate is usually adjusted near the current interest rate. Over time, interest rates vary and may be above or below the coupon rate.

Rate and price

 

Because investors buy bonds for the income they are earning, the higher the yield or the effective interest rate, the investment in a particular bond will be more attractive. However, if the increase in interest rates increases, the bond is more desirable, as other securities are paying better prices. The demand for bonds drops as investors go somewhere and the market value of the bond falls. However, reducing prices brings rise to yield, because an investor can now buy bond at a lower price, but get the same amount of interest as before. When the price drops enough, the yield has reached enough to repay the bond with an attractive option.

Maturity

 Maturity

Closer to a bond is at its expiration date, the lower the price of market price interests, the lower the price of the bond. The reason is simple: a bondholder owner will receive a moment of nominal value when the bond-issuing institution pays the principal. If you own these features and sell them at a nominal value discount, there is no incentive to sell them, as you can get more than one wait a bit. Additionally, investors do not buy a bond that is sold for more than the face value when you are close to maturity because there is not enough time for interest income offset the loss of charging a nominal amount lower than the price premium market.

Considerations

 Considerations

Although interest rates are the main determinants of bond prices, investors are also considering credit risk. The default risk is negligible for Treasury bonds and very low for government and local government bonds. The most important corporate bonds are also low risk investments, but the so-called junk waste has a huge risk because the issuer can not return to the borrowed funds represented by the bonds. Corporate and municipal bonds are rated according to services such as Moody and Fitch ratings based on credit risk. If a bond’s rating drops, the bond price usually falls because investors do not pay too much for it.