Interest rate and value of bond

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Sharwan Baluni

Sharwan Baluni (Querist)
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05 November 2012 Why does increase in interest rate lead to fall in the value of bond and Vice-verse?

CA Roshan Jha

CA Roshan Jha (Expert)
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05 November 2012 In my opinion, If interest rate rises than holders of bonds who are committed to receive a fixed rate of interest can not take advantage of such rise and hence the value of bond falls down and opposite happens in case of reduction in interest rates.

Sharwan Baluni

Sharwan Baluni (Querist)
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06 November 2012 How holder of bond cannot take advantage of rise in interest rate.

CA Roshan Jha

CA Roshan Jha (Expert)
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06 November 2012 Suppose, you have already Purchased a bond the interest rate of which is 10%.suppose the market rate at the time of purchase of bond was 8%, later on the market rate went up to 12%.will your bond interest rate will also rise to 12%? Answer is no, because you have already committed to a fixed rate of interest irrespective of market rate of interest. I hope you understood.

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