Question

1.What is the relationship between interest rate level and bond price? Why must this relationship be true? How has the current rate environment impacted the prices of bonds?

2. What are some factors to consider in evaluating a company's ability to make payments on outstanding debt? Please explain the factors rather than just providing a list.

Answer 1

As per policy, only one question is allowed to answer at a time, so answering Q1:

Q1)

The relationship between the interest rate level and bond prices should be in inversely proportional relationship, so when-ever interest goes up, the prices goes down.to each other. If the expected interest rate is higher, the purchase price of the bond would be in discount ie.lower the bond price. This relationship always hold true because future higher returns are always be discounted at the cost of present and vice-versa. However, lower the interest rate the safer the investment because the company would be confortable to pay the interest.

All the investing parties keep watching the current investment rates constantly and compare them with what they are getting, so that they can switch over to a higher interest investment opportunities. As market interest rates keeps changing now and then but the bonds coupon remain fixed, it is going to effect the bond prices and attractiveness of the investment. To be an attractive investment, the bonds coupon rate should be close to the market expected interest rate. Also, if the expected interest rate is higher the bond price would be lower.

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