Question

There is an inverse relationship between interest rate changes and changes in the market price of outstanding bonds. Explain the logic behind this principle. Given this relationship, do you believe it is currently a good time to buy bonds? Why or why not?

Answer 1

Yes, There is inverse relationship between interest rate changes in the market price of outstanding bonds. This is due to inverse relationship between bonds interest rate and marker price.

Bonds are debts of the company on which companies are pay the annual or half yearly interest. So while investing in the bonds investor always think if he invest the same money in the bank then what interest he can earn. So if the market interest rate is lower than bonds interest rate then people are ready to pay more for purchase of any bonds. If the interest rate of bonds are lower to compare the market interest rate the people will pay less then there face value.

Example: If the market interest rate is 5% and bonds interest rate is 8% than bonds market price will be more than there face value vice versa if there market interest rate is 8% and bonds interest rate is 5% than market price of the bonds will be lower than there face value.

Yes, Currently a good time to buy the bonds because the market interest rate are at lower site and bonds interest rate are more comparatively from the market . But overall this will not affect where you invest because if the interest rate is more of bonds than the bonds are selling at premium.