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Foundations Of Financial Management
Found in: Page 524
Foundations Of Financial Management

Foundations Of Financial Management

Book edition 16th
Author(s) Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Pages 768 pages
ISBN 9781259277160

Short Answer

Discuss the relationship between bond prices and interest rates. What impact do changing interest rates have on the price of long-term bonds versus short-term bonds? (LO16-2)

The bond prices and interest rates have an inverse relationship. When prices of bonds increase, the interest rates go down.

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Step by Step Solution


The term bond refers to a fixed-income financial instrument representing the money invested by an investor in a corporation for generating interest income and the principal amount.

Relationship between interest rates and bond prices

The interest rates and bonds prices move precisely in the opposite directions. If interest rates go up in the market, then the prices of a bond will go down.

The long-term bonds are impacted more because of interest rate variations in the market. Short-term bonds’ maturity date is closer than long-term debts.

Long-term debts are more sensitive to interest rate changes because they contain a longer duration than short-term bonds.

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