Why do bond prices go up as interest rates go down?

Question

Fixed income derivatives is where its at!

Answer 1

This is straightforward.

If a bond has a face value of $100 and a rate of 10%, you will get $10 on your $100 investment.

Now, if interest rates fall to 5%, then a new investor is going to only earn 5%. That person can either buy a new $100 bond and earn $5, or they can buy yours.

If they buy yours, would you be willing to sell something that pays $10 when everyone else is paying $5, and not expect a premium?

I did a little math and determined that you would be willing to sell at $104.76.

$104.76 + 5% = $110

Now, the new investor is indifferent. She can earn 5%, the market rate, no matter what.

You on the other hand are loving life - Filet mignon tonight. HOWEVER. If interest rates went up instead, guess what happens to your bond price? You're brilliant! The price would go down, and you lose - Its ramen noodles tonight!

Answer 2

No es la primera vez que compra de aquí memorias RAM y siempre han cumplido mis expectativas, hace una semana he comprado una memoria RAM de 8Gb, en un solo modulo tengo la velocidad de respuesta que espero de mi ordenador, me he quedado impresionante de su rendimiento y todo por un excelente precio.

Answer 3

to match the interest payment.