Inverse relationship between interest rates and bond prices.

• Bond prices and interest rates

  Have an inverse relationship
• As interest rates rise in the economy

  Bond prices will decrease
• As interest rates fall in the economy

  Bond prices will increase
• Price of a bond

  The principal or the face value of a bond
• Bond price

  Represents the money lent to the corporation who issued the bond
• When an investor buys a bond

  The issuer agrees to pay the investor an interest rate to borrow their money
• Interest rates rise to 15% in the economy

  New bonds issued will earn investors more profit, making the 10% interest on the existing bond less attractive
• Investor tries to sell their bond

  Investors will walk away and buy a bond at the new higher interest rate
• To sell the bond

  The price must be lowered to adjust for the difference in interest rates
• Interest rates fall to 5% in the economy

  New bonds issued will earn investors less profit, making the 10% interest on the existing bond more attractive
• When interest rates rise

  The bond earns less profit at its fixed interest rate, making it less valuable and less demanded, decreasing its price
• When interest rates fall

  The bond earns more profit at its fixed interest rate, making it more valuable and more demanded, increasing its price
• coupon is the guaranteed fixed annual interest payment
• What is a coupon?

  coupon is the guaranteed fixed annual interest payment
• Maturity is the time when the bond is paid back
• What is maturity?

  Maturity is the time when the bond is paid back
• How to calculate the yield of a bond:

  A) annual coupon payment

  B) bonds current market price

  C) 100