Question

Discuss the relationship between bond prices and interest rates. What impact do changing interest rates have on the price of long-term bonds versus short-term bonds? Your answer must be supported with examples and academic citations.

Answer 1

Interest rates and bond prices have an adverse correlation. Bond prices grow during periods of low-interest rates and decline during periods of high-interest rates.

What is the interest rate?

The cost of borrowing and the rewards for saving are both indicated by the interest rate. Since there is a premium if the coupon rate is higher than the market rate, the bond's price will be higher. Bond prices will decrease if the coupon rate is lower because there will be a discount.

The price of long-term bonds is more affected by interest rates than the price of short-term bonds. A bond's price varies depending on how long it is.

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