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Essentials Of Investments
Found in: Page 329
Essentials Of Investments

Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

Short Answer

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

Bond prices and interest rates are inversely proportional. So, an increase in interest rates decreases the bond prices.

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Step by Step Solution

Explanation on price and interest rates relationship

Changes of the market rates don’t affect the bond’s coupon interest payment or principal repayment. Therefore on the increase of market rates, the bond investors in the secondary market are not willing to pay as much for a claim on bond’s fixed interest.

Explanation on the reason for the price decline

If the interest rates are lower, investors would not want to invest in such bonds that would lead to its decline.

This inverse relationship between interest rate and present value can be noted from the decrease in present value of future cash flows with increase in discount rate.

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