Question

Please explain why bond prices are subject to changes in interest rates.   

Describe the characteristics of a bond and provide an example of a firm or government entity that has recently issued (sold) these securities.

NEED 300 WORDS

PLEASE DON'T WRITE ALREADY EXISTING CHEGG ANSWERS

Answer 1

Bond costs square measure reciprocally correlative with interest rates: once rates go up, bond costs fall and vice-versa.

How Bonds Work

Bonds square measure usually remarked as mounted financial gain securities and square measure one among 3 quality categories individual investors square measure typically conversant in, in conjunction with stocks (equities) and money equivalents. several company and government bonds square measure in public listed; others square measure traded solely over-the-counter (OTC) or in private between the receiver and loaner.

When firms or different entities ought to raise cash to finance new comes, maintain current operations, or finance existing debts, they'll issue bonds on to investors. The receiver (issuer) problems a bond that has the terms of the loan, interest payments that may be created, and also the time at that the loaned funds (bond principal) should be paid back (maturity date). The interest payment (the coupon) is an element of the come that bondholders earn for lending their funds to the institution. The charge per unit that determines the payment is termed the coupon rate.

The initial value of most bonds is usually set at par, typically $100 or $1,000 face value per individual bond. the particular value of a bond depends on variety of factors: the credit quality of the institution, the length of your time till expiration, and also the coupon rate compared to the final charge per unit atmosphere at the time. The face price of the bond is what's going to be paid back to the receiver once the bond matures.

Most bonds is sold-out by the initial investor to different investors when they need been issued. In different words, a bond capitalist doesn't need to hold a bond all the manner through to its maturity. it's additionally common for bonds to be repurchased by the receiver if interest rates decline, or if the borrower’s credit has improved, and it will reissue new bonds at a lower value.

Characteristics of Bonds

Most bonds share some common basic characteristics including:

Face value is the money quantity the bond are value at maturity; it's additionally the reference quantity the bond institution uses once conniving interest payments. for instance, say AN capitalist purchases a bond at a premium $1,090 and another capitalist buys constant bond later once it's commerce at a reduction for $980. once the bond matures, each investors can receive the $1,000 face price of the bond.
The coupon rate is the speed of interest the bond institution can pay on the face price of the bond, expressed as a share. for instance, a five-hitter coupon rate implies that bondholders can receive five-hitter x $1000 face price = $50 each year.
Coupon dates are the dates on that the bond institution can build interest payments. Payments is created in any interval, however the quality is period of time payments.
The maturity date is the date on that the bond can mature and also the bond institution can pay the investor the face price of the bond.
The issue price is the worth at that the bond institution originally sells the bonds.