If interest rates of bonds are expected to rise in the future, why do we sell bonds? How in doing so do we avoid capital loss?
2007-02-16 22:23:30 · 2 answers · asked by elspringster 2 in Social Science ➔ Economics
You are expecting future new bond issues to have higher interest rates. The bonds you have currently hold have a fixed issue rate that is lower. You would want to sell them and free up money to buy the new ones to make more interest. If you are stuck with the old ones when the new ones came out, they would be worth less by the difference in interest rate. If you were selling the old bonds and someone else was selling new bonds, you would have to lower your price by the difference in the interest. So your bonds are now worth less.
2007-02-16 23:35:02 · answer #1 · answered by JuanB 7 · 1⤊ 0⤋
People have different expectations about the future and different personal discount rates. The people who buy bonds think the flow of income they receive will compensate them for their expectation of capital loss. If not enough people feel this way to support the market in bonds, interest rates rise until supply=demand.
2007-02-16 23:28:10 · answer #2 · answered by meg 7 · 0⤊ 0⤋