If interest is an economy rise after a bond have been issued what will happen to the bond market price explain

Question

If interest is an economy rise after a bond have been issued what will happen to the bond market price explain?

Answer 1

Let us say you purchased a bond at issue price of 100 giving you annual coupon (interest) of 10. Now after the issue and purchse interest rates rise by 100 bp or 1% points. So given the duaration and rating of the same bond, investors will expect a coupon of 11 from the same bond as new bonds of similar durating, rating etc will be issues at 100 only with a coupon (interest) of 11. So, if you want to sell the bond you purchased now, you wont get 100. You will get less than 100. Probably you will be able to sell the bond at somewhere around 91.
Thus the interest and the bond price in the nmarket are inversely related. Bond price ( value) equals the present value of the series of coupons that one would get over successive years. A change in the interest rate implies that the discount rate to calculate the present value of coupons will rise. A higher discount rate to convert future amounts of coupon to present value means that the present values will decline. So, higher interest rate means lower price or value of an existing bond.

Answer 2

Price of the bond x interest rate = Fixed revenue
You get a fixed amount of money in the long run. If you get a bond for 100 at 1%, you receive 1 unit. If the interest rate goes up to 10% and you receive 1 unit, what will be the price of the bond in the market ? It will be 1/0.10= 10. The price of the bond has gone down ten times. Price=Fixed revenue/rate
Interest rate=10/100=0.10=10%

Answer 3

the bond price goes down as the interest rate rises

Answer 4

I agree with Ralph C and Muncie when it comes to low risk bonds, but for junk bonds there are other factors at play. i.e. when the economy grows and interest rates rise, prices of high-grade bonds will certainly drop..........

.......but prices of junk bonds can rise along with rates during periods when the risk of default is declining.

That happened in 1999. For the year, interest rates on 10-year Treasuries rose from 4.7% to 6.5%, and intermediate government issues lost 1.8%. But with the economy growing, high-yield funds returned 5%. If interest rates rise next year, as many economists expect, high-yield bonds could continue their strong negative correlation with Treasuries.

Answer 5

Market price will go down because people can get a better rate elsewhere.