Impact of Market Interest Rates on the Market Value of an Existing Bond

What kind of relationship does market interest rate changes and the market value of an existing bond have?

Inverse relationship

Inverse relationship

Higher values of one variable is associated with lower values of the other

Why is it an inverse relationship?

When interest rates rise, the market value of existing bonds typically falls, and vice versa. This is because new bonds issued at higher interest rates become more attractive, making existing bonds with lower rates less desirable.

What happens when interest rates in the market rise? Why?

The value of existing bonds with lower fixed interest rates declines; because investors can now purchase newly issued bonds with higher interest rates. To make existing bonds more attractive, their prices must decrease to compensate for the lower yield

What happens when interest rates decline in the market? Why?

The market value of existing bonds generally increases; new bonds at lower rates become less appealing compared to existing bonds with higher fixed rates; increased means of existing prices drives up their prices

Interest rate risk

The inverse relationship between interest rates and bond prices

Bond duration

Measurement of the sensitivity of a bond’s price to changes in interest prices