Question

Why are bond price and interest rates negatively related.

What is the role of term to maturity and coupon rate to this relationship ?

Answer 1

Bond price and interest rates are any negatively correlated with each other as whenever there will be increase in the interest rate,it will mean that the bond yield will be going up and the bond prices will be going down in order to adjust the overall payment of the bond at the maturity because the bond will always pay the principal payment at the maturity if it is not defaulted.

When the interest rate will be going up, it will also mean that the bond will be becoming lower attractive as there will be lower rate of return which will be available on the bonds and hence the attractiveness of bonds will come down.

YES, term to maturity and coupon rate are also playing an important role in relationship in respect to Bond price and interest rate as when there will be a long term to maturity, it will mean that there is a higher risk associated with these bonds and hence when the interest rate will go up,these bonds are looking more risky at the time of the inflation as they are also offering with a lower rate so the bond prices will be going down.

Coupon rate are also related to the inverse correlation of the interest rate and the bond prices as the bonds are offering a lower coupon rates, it will mean that when the interest rate in the economy will be going up these bonds will be losing their attractiveness in relation to the prevalent market rates and hence it would be leading to decrease in the price of the bond.