Conceptually, why does a bond's price fall when required returns rise on an existing fixed income...

Conceptually, why does a bond's price fall when required returns rise on an existing fixed income security?

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Expert Solution

Bond Prices are the present value of future cash flows from the bond discounted at the Yield to maturity of the bond. Now when the required return on an existing fixed income security rises on a comparabale bond, the YTM increases as YTM is the required return. As YTM is inversely proportional to the price of the bond, the bond prices fall with rise in YTM.

Price of Bond = (FV+C) / (1+YTM)^n + (C/(1+YTM)^n

jeff jeffy answered 2 years ago

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