Question

1. How are bond prices determined in the market? What is the relationship between interest rates and bond prices? Have you ever purchased a bond? If so, what was your experience with the purchase price and the value of the bond over time?

Answer 1

Bond prices are determined by discounting the cash flows related to bonds at the present value.when the bonds are traded in the market, the price are determined majorly by the three factors which are impacting the bonds and those three factors will be maturity of the bonds and supply and demand of the bond along with the credit quality of the bond.Bond yields and prevailing interest rates are also other factors relating to determination of prices of the bonds in the market.

There is an inverse relationship between the bond prices and interest rates because when the interest rates in the market will be increasing the bond price will be decreasing and when the interest rate in the market will be decreasing,the bond price will be increasing so there is an inverse relationship between both the interest rate and the bond prices.this inverse relationship will be reflecting the the adjustment of Bond prices to the prevalent market rate.

Yes, I have purchase the bond and it was a zero coupon Bond so this bond was issued at discount than the face value and it was redeemed by me at the face value so the difference between the the discounted price and the face value was my overall gain as the zero coupon bonds are generally not paying any kind of interest to their Bond holders.