Question

1. Why do bond prices go down when interest rates go up? Don’t bond investors like to receive high interest rates?

Answer 1

Bond prices go down when the interest rates are high and vice versa. This is because when the interest is high the market is high and delivering the investors will get or receive the interest from the market or anywhere else. So the price of the bond goes downward to give interest at the current rate.

practically many bonds offer fixed interest rates, now if the interest rates get lowered then comparing it with bonds interest rate, it will attract investors. So the price of the bond rises. But when the interest rates get higher it surpasses the interest offered by the bonds and hence people start investing in other option hence the price of the bond fell down.

examples of this kind are well explained by zero-coupon bonds. Let us see how?

you are getting a bond at $940 whose face value will be $1000 at the time of maturity. So the amount of interest you are getting at the time of maturity=(1000-940)/940 = 6.38%. Now when the interest rate is at 8% or says at 10% who is going to invest in bonds, no one so the price of bonds is reduced to match the level of interest rates . for example, in this case, to get the 10% from the bond the prices will be reduced from 940 to somewhere around $910.

now when the interest rates fell down to 5% our 6% ROR will look attractive and people will start investing and the prices will go up.

Generally, people investing in different bonds or government bonds want greater security than the high Rate of Return.