Relationship between bond prices and interest rates | Finance & Capital Markets | Khan Academy
Khan Academy・1 minute read
Bond prices move inversely to interest rates, with examples showing how a $1,000 bond's price changes based on varying rates, explaining the price adjustments in detail. Additionally, the text highlights the relationship between interest rates and zero-coupon bond prices, demonstrating how these prices increase as interest rates decrease.
Insights
- Bond prices change in opposition to interest rates; when rates rise, bond prices fall, and when rates drop, bond prices rise.
- The price of a bond is intricately linked to prevailing interest rates, with fluctuations in rates directly impacting the value of the bond, especially evident in zero-coupon bonds that see a rise in price with lower interest rates.
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Recent questions
How do bond prices change with interest rates?
Bond prices move inversely to interest rates. When interest rates rise, bond prices decrease, and when interest rates drop, bond prices increase.
What happens to bond price if interest rates rise to 15%?
If interest rates rise to 15%, the bond price decreases due to the lower coupon rate compared to the market rate.
How does a $1,000 bond with a 10% coupon work?
A $1,000 bond with a 10% coupon pays semi-annually, with the initial price set at $1,000 based on the 10% coupon rate.
Why does the price of a bond decrease with higher interest rates?
The price of a bond decreases with higher interest rates because the coupon rate becomes lower compared to the market rate, leading to a decrease in bond price.
What happens to the price of a zero-coupon bond with lower interest rates?
The price of a zero-coupon bond rises with lower interest rates, as the bond becomes more valuable in comparison to the market rate.
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Summary
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Bond prices and interest rates relationship explained
- Bond prices move inversely to interest rates
- Example of a $1,000 bond with a 10% coupon paid semi-annually
- Diagram illustrating coupon payments over two years
- Initial price of bond set at $1,000 based on 10% coupon rate
- If interest rates rise to 15%, bond price decreases
- Price reduction explained due to lower coupon rate compared to market
- Conversely, if interest rates drop to 5%, bond price increases
- Calculation for zero-coupon bond price at different interest rates
- Price of zero-coupon bond rises with lower interest rates
