2006-09-17 11:55:04 · 3 answers · asked by Anonymous in Business & Finance ➔ Other - Business & Finance
Yes, inverse relationship.
Let me, hopefully, explain with a simple example:
Let's say you hold a 10-year bond that has an interest rate of 4%. If the interest rate goes up to 7%, then why would anyone want to buy the bond you hold when they can purchase a new bond at the higher rate of 7%. Therefore, in order to sell the bond you own, you must decrease the price in order to offset the lower return (4%) it will give the buyer.
Interest rates go up = the price of bonds go down.
Interest rates go down = the price of bonds go up.
2006-09-17 12:05:20 · answer #1 · answered by Zak 5 · 1⤊ 0⤋
no they have an inverse relationship from the very mechanisms they are. if the interest rate is high you can make more money from investing in a bank. if the interest rate is low you can get more out of a bond. and then on the flip side if you need to borrow money and the bond rate is high you will borrow from a bank and if the bond rate is low you will issue a bond. so these two forces combined move them opposite each other.
2006-09-17 11:58:58 · answer #2 · answered by gsschulte 6 · 0⤊ 1⤋
That's a peculiar way of saying it, but I suppose it is true. There is a direct, mathematical relationship between bond prices and interest rates. If you want to put a finer point on it, there are other factors as well, but I think you are mostly correct.
2006-09-17 11:57:48 · answer #3 · answered by AngiesHusband 5 · 0⤊ 0⤋