Discuss, with examples, how the market interest rates affect the value of bonds.

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Expert Solution

Relationship between Bond Value and Market Interest Rates (YTM)

YTM and Bond Value has inverse relationship.

If YTM increases, the price or value of bond decreases. Similarly, if YTM decreases, the price or bond value increases....other things remaining constant.

It can be understood by the following example,

Let the yield be 10 %, of a bond of par value of 1000, maturing in 5 years providing a coupon rate of 12%.

The value of bond today B is given by

Let the yield be 15 %, of a bond of par value of 1000, maturing in 5 years providing a coupon rate of 12%.

It can be observed from the above example, that with the increase in Yield Rate from 10% to 15%, the bond price has decreased from 1,075.80 to 899.46.

jeff jeffy answered 5 months ago

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