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Vijay Work
Change of Bond prices due to Change in interest rates
Bonds would essentially compete with the other income interests made on the interest rates by the investor providers. If the interest is grown-up usually, then the income rates would also increase gradually, which makes the providers get more income for the investors. But when the situation occurs with bonds are going down gradually at that times there results in declining the interest rates, then automatically the bond prices would rise gradually according to the situation, as the part of it the rise in the demand makes the increase in the market price for all the bonds, that is as the bonds are of higher demand then the bonds sellers would price their rates to the higher levels in terms of face values. But the principle we have is that the bond rates and the interest prices go automatically opposite each other they do not pose equal reactions among them. This kind of concept or phenomenon is called the interest rate of risks (Dor & Xu, 2015).
A bond is a fixed income investment on which all the investors make various loans. The government bonds are issued by the investments made on the premises if the government; for instance, the government makes a 10years bond of 5% on the coupons for the amount of $10,000. As per the bond for every year, they pay an interest of 5% to your amount of $10,000. But when you want your money returned after the maturity is completed, then the same amount as what you have invested will. Come back, that is $10,000. Some of the characteristics of bonds include all the maturity, coupon rate, tax status, and the Callability. Whereas through the bonds, there include different kinds of risks which are associated with them. Some of those are rate risk, credit or debit risks, and the prepayment risks (Major, 2019).
References
Dor, A., & Xu, Z. (2015). Should Equity Investors Care about Corporate Bond Prices? Using Bond Prices to Construct Equity Momentum Strategies. The Journal Of Portfolio Management, 41(4), 35-49. https://doi.org/10.3905/jpm.2015.41.4.035
Major, J. (2019). Methodological Considerations in the Statistical Modeling of Catastrophe Bond Prices. Risk Management And Insurance Review, 22(1), 39-56. https://doi.org/10.1111/rmir.12114
Sravani Work:
Bond Prices vs Interest Rates
Bond Prices and Interest Rates are inversely proportional i.e. if interest rate decreases then bond price goes up and vice versa. Simple reason supporting the statement is most bonds pay a fixed interest rate that becomes more attractive if interest rates fall as there will be more investor demand that will drive up the price of the bond (Lioudis, 2020). Bonds tends to possess less risk when compared to stocks because bond issuer has a promise to repay bonds. Most of the experienced investors tend to possess both stocks and bonds in right proportions to maximize returns. Bonds essentially compete against one another on the interest income they provide to investors. When interest rates go up, new bonds that are issued come with a higher interest rate and provide more income to investors. When rates go down, new bonds issued have a lower interest rate and aren’t as attractive as older bonds. Unfortunately, when rates go up, the older, lower-rate bonds can’t increase their interest rates to the same level as the new, higher-interest bonds. The older bond rates are locked in, based on the original terms. As a result, the only way to increase competitiveness and value to new investors is to reduce the price of the bond. But as a result, the original bondholder may be holding an investment that has decreased in price—and doesn’t pay out as much as they could get for it right now on the market (Luthi, 2020).
Characteristics of Bonds
Different types of bonds are corporate bonds, municipal bonds, government bonds and agency bonds. Basic characteristics of bonds are face value, the coupon rate, coupon dates, the maturity data and the issue place. Face value implies the equivalent money value at the time of maturity. The coupon rate is the interest rate that bond issuer will be paying on the face value of the bond. The dates on which interest payments are made by bond issuer are coupon dates. When bond issue pays face value of the bond after maturity of the bond then that is considered as the maturity date. Price at which bonds are sold originally is the issue price. We are facing unprecedented times since March due to COVID-19 and to keep the economy from falling federal government has pledged to buy corporate bonds from different firms in various sectors. Federal government has bought $1.3 billion corporate bonds and securities from giant and mid-sized corporates like Apple, Microsoft, Home Depot, AT&T, PepsiCo, Berkshire Hathaway etc. This action will keep the interest rates lower and encourage other investors to buy more bonds instead of panic selling.
References
Lioudis, N. (2020, August 28). The Inverse Relationship Between Interest Rates and Bond Prices. Retrieved October 01, 2020, from https://www.investopedia.com/ask/answers/why-interest-rates-have-inverse-relationship-bond-prices/
Luthi, B. (2020, July 28). Here’s Why Bond Prices Drop When Interest Rates Go Up. Retrieved October 01, 2020, from https://www.thebalance.com/why-do-bond-prices-go-down-when-interest-rates-rise-2388565
Marotta, D. (2014, April 08). Every Bond Contract Has At Least Five Components. Retrieved October 01, 2020, from https://www.forbes.com/sites/davidmarotta/2014/04/08/every-bond-contract-has-at-least-five-components/
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