Purchase Solution

Bond's value and interest rates

Not what you're looking for?

Ask Custom Question

How does a bonds value change with the interest rate?

Purchase this Solution

Solution Summary

Explains why bond's value changes with a change in interest rates.

Solution Preview

How does a bonds value change with the interest rate?
A bonds value (price) is the discounted value (present value) of the coupon payments and the redemption amount that a bondholder receives
The coupon payments and the redemption amount does not change over the life of the bond,i.e they do not change with the market interest rate. However discounting depends on the interest rate and as interest rates change the discounting factor changes.
We use interest rate to discount the payments. Higher the discount rate , lesser is the Present value / Discounted value
Therefore when the interest rate increases the value of the bond decreases and when the interest rate falls the bond value increases.

Let us explain it with the help of an example:

Let the par /face value/redemption mount be equal to $1,000
Let the coupon rate be 10%
Let the coupon payments be annual
Let the life of the bond be 10 years

Case ...

Purchase this Solution


Free BrainMass Quizzes
Solving quadratic inequalities

This quiz test you on how well you are familiar with solving quadratic inequalities.

Geometry - Real Life Application Problems

Understanding of how geometry applies to in real-world contexts

Probability Quiz

Some questions on probability

Graphs and Functions

This quiz helps you easily identify a function and test your understanding of ranges, domains , function inverses and transformations.

Know Your Linear Equations

Each question is a choice-summary multiple choice question that will present you with a linear equation and then make 4 statements about that equation. You must determine which of the 4 statements are true (if any) in regards to the equation.