Question

Explain how interest income, possible increase in value and repayment at maturity factors are reasons to invest in bonds

Answer 1

Bond Prices depends upon various factors such as interest income, par value, maturity value ,market interest rates. All these factors tend to fluctuate the price of the bonds. If the market interest rates tend rise then the value of the bond will fall. The reason for the same is that the coupon rate of the bond that an investor holds is fixed and hence if the market interest rates rise that means other bonds will pay more interest then the investor will be tempted to give up the existing bond and go for the bond that gives better return.

Interest Income from bond is fixed throughout the tenure of the bond and this incentivize the investor to invest in bonds. The reason for the same is that the investor gets a fixed return in the form of interest income and also in the final year of the life of the bond the actual value of the bond plus the interest income along all the years is received.

Increase in value of the bond occurs when the market interest rates falls. The reason for the same is that the current bond that the investor holds gains value as compared to the other bonds that are in the market. Hence this increment in the value acts as an incentive for a rational investor to invest in bonds.