If interest rate goes up why does price go down

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If interest rate goes up exchange rate will be go down

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"The $90 on $900 gives the same yield as the $100 does on the..."

With a name like winston financial why are you asking me that question. In order for all bonds to be interchangeable instruments their yield top maturity must always bev the same,. So if you but a $1000 bond with a 9% coupon or $90 then you have a 9% yield . if interest rates rise so that a new bond is issued with a 10% coupon or $100 the bond with the 9% coupon must drop to $900 so that the $90 on $900 gives the same yield as the $100 does on the $1000. If interest rate goes up� why does price go down. � How might I best go forward.

This answer closely relates to:

Q. Relationships among interest rate, bond price, and stock price?
i am very confused and hope some economic wizards could help me out here. interest rate and bond price have an inverse relationship. when rate goes up, bond price goes down because future cash flows are discounted at a higher rate. in addition, interest rate and stock price also have an inverse relationship. when interest rate goes up and stock price goes down because corporations now have to borrow at a higher rate, which narrow down the number of profitable projects they can undertake. the funny things is that stock price and bond price are said to also have an inverse relationship because when stocks have excellent returns, investors often abandon bond in favor of stock, resulting a decrease in bond price and an increase in bond yield. i am confused here and hope i am not confusing you all. please help me understand the relationships among them. thanks~!! just want to clarify my question a little bit. for example, if interest rate goes up, that would mean bond price and stock price would both go down, but bond price and stock price should move in the opposite direction in theory. thanks again~!

"It is true that when interest rates go up..."

Your suppositions are pretty firmly based already. Having been 100% invested in bonds for two years, I have a special interest in those instruments. It is true that when interest rates go up, existing bond values go down for the reason you mention. That may matter to people who want to buy bonds, but it doesn't matter at all to those who have no interest in selling. All we care about is the viability of the institution whose bonds we bought. Viability is the area in which stock and bond values intersect. Bond values take into account a company's viability as well as the interest rate. Such is expressed in terms of "ratings" such as Moody's. Day-to-day sentiment is going to influence traders' actions. If the market is bounding ahead at 10% per annum, who wants bonds at 4%? On the other hand, if the market is tanking at 20%, bonds paying 2% look pretty good. Eventually, though, there must be a confluence of the relative values of stocks and bonds. If stocks tank, there must be a negative influence on the rating of any bonds that the institution has issued. The stocks tanked for a reason. The same is true of the reverse case. More stock confidence, more bond rating confidence. As I said, viability.

Q. How can an increase in the interest rate make bonds more attractive and reduce their price?
the demand for bonds an increase in the interest rate makes bonds more attractive, so its leads people to hold more of their wealth in bonds, as opposed to money. however, you also learned that an increase in the interest rate reduced the price of bonds. how can an increase in the interest rate make bonds more attractive and reduce their price?

"To purchase a bond at this current interest rate because the interest rate may..."

Bond prices move inversely to interest rates. When interest rates go up, bond prices go down and when interest rates go down, bond prices go up. Remember, we’re talking about previously issued bonds trading on the open market. The inverse relationship is easy to see with this simple illustration. A bond is issued for $10,000 for five years with a 5% coupon or interest rate, paid every six months. Then interest rates rise to 6%. If you want to sell this bond, who would buy it when it is paying 1% below market rates (5% vs. 6%)? You have to sweeten the deal so the buyer gets a market rate for the bond. You can’t change the interest rate on the bond. That’s fixed at 5%. You can, however change the price you will take for the bond. The annual payment of $500 ($10,000 x 5%) must equal a 6% payment. Doing the math, you discover that the face value of the bond must be discounted to $8,333 so that the $500 fixed payment equals a 6% yield on the buyer’s investment ($8,333 x 6% = $500). If interest rates went down instead of up, you could then sell your bond at a premium over face value because the fixed interest rate would be higher than the market rate. Now say you don't have any bonds, and the interest rate rises to 6%. If this is a high interest rate, it's a good idea for you to purchase a bond at this current interest rate because the interest rate may decrease in the future. Thus, bonds are more attractive than holding money when the interest rate is high.

Q. Does a bond price adjust to earn the same interest when market interest rate changes?
i've been told that bond prices adjusts to earn the market interest rate. i tested this out with an example when the coupon rate changes and it worked. however when i tested it for changes in the market interest rate, the bond price doesn't seem to be adjust to earn the same interest at the market interest rate. am i doing something wrong or is it supposed to be like this since you have are getting the same payments (same coupon rate x same principle)? thanks

"Market value of the bond rises or falls inversely with the yield..."

This may work for treasuries since the risk remains stable and may not work for municipal or corporate bonds. Also since the market value of the bond rises or falls inversely with the yield , there will be either a capital gain or loss at maturity of the bond. Therefore the yield of a 2.75% or 3.00% coupon bond with the same maturity will not be exactly the same due to the differences in capital gains or loses at maturity.

Q. Why do interest rate changes affect the price of longer term bonds more?
hello, i understand the concept that higher interest rates mean lower bond prices and vice versa. however, what i don't understand is why an interest rate decrease causes the price of long-term bonds to rise at a higher percentage than the rise of short-term bond prices. likewise, if interest rates go up, why would the long-term bond prices do down at a higher percentage than short-term bond prices. would appreciate anyone's help. thanks!

"The current price of a bond is determine by..."

The current price of a bond is determine by computing its present value using the current interest rate of similar bonds rather than the interest rate at which it was issued. The present value of a bond is the sum of the present value of a future amount (the face value of the bond) and the present value of an annuity (the bond's coupon payments). As the term to maturity increases, the effect of interest rate changes becomes greater. As the present value formulas are exponential functions, the effect increases with time at an increasing rate. The proper term for this effect is interest rate sensitivity. This should become apparent if you do some sample present value (PV) computations in a spread sheet. You can do it in two steps: PV of a future amount and PV of an annuity.

Q. What is a bond, bond price and interest rate?
and why does bond price rise when interest rate falls? i'm taking an economics course i don't get what a bond is. i'm told it's buying someone's debt but it doesn't make sense. also, what does it mean for a bank to buy a government bond, and also a goverment to buy a bond from a bank? what is a bond price? is it the same amount as the debt of someone selling the bond? i'm so confused.

"The market price of the bond fluctuates to equate..."

If you buy a bond you are buying someone's debt. They will make interest payments to you until the maturity date at which point they pay you the face value of the bond. Bonds have two prices, the face value and the market price. The face value does not change and is largely irrelevant after issue and before maturity. The market price of the bond fluctuates to equate the market rate and the nominal rate on the bond. For example, let's say the market interest rate is 5% and we're dealing with a $10,000 bond that yields 6%, meaning the interest payments are $600. The price of the bond will be $12,000 in order to reduce the fixed $600 payment to 5%.

Q. Relationship between inflation, interest rate, and bond price?
hello all, when interest rate goes up, that means inflation is going down. i read it in the newspaper that as interest rate goes up, bond price goes down. however, as ir increases, inflation goes down, doesn't that make bonds more attractive now since the inflation is not causing the bond investor to lose money. therefore, shouldn't bond price go up? thank you.

"Interest rates and inflation are somewhat correlated..."

Interest rates and inflation are somewhat correlated, but not linked. And it depends a bit on what term of interest you are considering. It is often the case that pumping pumping more currency into the economy will simultaneously increase long rates while decreasing short rates.

Q. Why is the interest rate referred to as the price of money?
1. why is the interest rate referred to as the price of money? 2. when government change interest rates through monetary policy in times of boom and high inflation ? 3. which direction do they want interest rates to go?

"If interest rates go down..."

1. If you wanted an extra 100k, you'd have to 'get' it from someone else. Hence you're 'renting' their 100k from them, for your use. Of course you have to pay them back, plus a fee (interest) for them letting you use it. 2. The reason bread is a $1, is because there's a certain amount of money TODAY, with a certain amount of PEOPLE today. If interest rates go DOWN, and people think "gee I don't have $500 in the bank, I borrowed money, now I have $2000 to spend today, - and make 'me' of the future pay it back"... The more things are bought today by 'stealing' away from the future. Lower interest rates means more spending today, which can lead to inflation. This all works backwards if interest rates go up. "Savers" want interest rates to go up. "Spenders" want interest rates to go down.

Q. Why do we have to use the continuously compound interest rate to calculate the future price ?
why do we have to use the continuously compound interest rate to calculate the future price ? the future price calculation model is in future market (ex: f=se^rt). why we do not use quartely or yearly compound but the continuous compound.

Since the future market changed on daily basis so do the interest rates thats why we calculate compound interest on daily basis.

Q. Anyone know how to find the rate using the simple interest formula? i=prt [interest=price(rate)time]?
the numbers i am using are interest- $975 price- $8000 rate- unknown time- 6 months

I = PRT 975 = 8000*R*½ 975 = 4000 R Divide both sides by 4000: R = 975 / 4000 R = 0.24375 Answer: 24 3/8%

Q. (help ~in hurry) how does the convertibility feature affect the bond's price and interest rate?
what is convertible bond?

"This will affect the price of the bond generally lowering the..."

A convertible bond is one which can be exchanged for shares of stock in that company. The conversion feature makes the issuance of a bond more appealing to the company and to some investors. This will affect the price of the bond generally lowering the price and raising the interest rate. From the company's point of view the conversion feature allows them to convert the bond to a non interest bearing security. They have to pay interest but do not have to pay dividends. From the customer's point of view the bond could turn into an equity (stock) and allow for faster appreciation. So say for example that you have one bond par 1000 that is convertible at $20. (this means that the bond has a face value of $1000.00 and is convertible into shares of $20.00 each. that means that you would get 50 shares for your bond. $20x50=$1000.00 if the stock price is higher then the 20 then you would be better off having the shares (50 shares at 20 when the stock is trading at 30, leads to a profit of 50x$10= $500.00) if the stock price drops below the $20 mark then you would be better holding the bond. Of course in the real world the bond would adjust in value to remain at pairity to the stock price (however always mature at $1000) but the above assumes that you hold the bond or to maturity. (I am going to assume that your question is for a test or class)

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