/biz/ - Business & Finance

>>11396764
When a bond's yield rises, by definition, its price falls, and when a bond's yield falls, by definition, its price increases.

Interest Rate+ Bond Yield -

I suppose rather than saying hurt, I should have said lowered. I see where that could have caused confusion.

EX:
You've just purchased a bond with a maturity of five years, a coupon of 5.0%, and you bought it at par (i.e.; 100%), investing $1,000. At this point, your bond is worth exactly what you paid for it, no more and no less. Also, just to be clear, you will receive annual interest of $50 ($1,000 x 5.0% = $50), plus a return of your principal at maturity. However, the market value of your bond will fluctuate after your purchase as interest rates rise or fall. Let's assume that interest rates rise. In fact, let's assume they rise to 7.0%. Because new bonds are now being issued with a 7.0% coupon, your bond, which has a 5.0% coupon, is not worth as much as it was when you bought it. Why? If investors can invest the same $1,000 and purchase a bond that pays a higher interest rate, why would they pay $1,000 for your lower-interest bond? In this case, the value of your bond would be less than $1,000. Hence, your bond would be trading at a discount. Conversely, if interest rates were to fall after your purchase, the value of your bond would rise because investors cannot buy a new issue bond with a coupon as high as yours. In this case, your bond would be worth more than $1,000. Hence, it would trade at a premium.

>>10416231