Bond Interest Rates

[dreamyxq]

So I was reading this article online

http://moneyover55.about.com/od/howtoinvest/qt/bondpricesrisinginterestrates.htm

that talks about how bond prices goes down when interest rate rises and vice versa..

But something is really confusing me, I thought the interest rate for the bond (aka coupon rate) is fixed? Say, a newly issued bond that matures in 10 years, with a coupon rate of 3%, isn't the 3% rate fixed? How would that rate change to "affect the bond's price"?

 

[wahkao3]

Heng I also know fixed income. Let me help u


I thought the interest rate for the bond (aka coupon rate) is fixed?
-Yes fixed



Say, a newly issued bond that matures in 10 years, with a coupon rate of 3%, isn't the 3% rate fixed?
-yes it is fixed


How would that rate change to "affect the bond's price"?
- Someone holding this bond may choose to sell it to another guy. Potential buyers will look at the current interest rate. If the current interest rate is like 10%, this 3% bond doesnt look very attractive and the buyer would want a discount to make it attractive enough.

if the current interest rate is like 0.5%, this bond looks very attractive and the seller would want a premium price.

 

[Mecisteus]

https://secure.fundsupermart.com/main/sgsInfo/sgsSchool.tpl

read above.

 

[Bedokian]

To put it simply, investors would place their capital where it gives them the most bang for their buck.

 

[lzydata]

The coupon stays the same, but the price of the bond fluctuates.

 

[FP_IFA]

Let said the bond price is $1 and the yield is 3% and matured in 10 years. The interest rate then jump from 1% to 3.5% on the 2nd year. If you are the bond owner, would you still hold on to the bond that give you 3% or would you switch out to maybe put into something else instead?

 

[dreamyxq]

......

How would that rate change to "affect the bond's price"?
- Someone holding this bond may choose to sell it to another guy. Potential buyers will look at the current interest rate. If the current interest rate is like 10%, this 3% bond doesnt look very attractive and the buyer would want a discount to make it attractive enough.

if the current interest rate is like 0.5%, this bond looks very attractive and the seller would want a premium price.

By "current interest rate", what interest rate are you referring to? since the bond's rate does not change.

 

[Keverus]

By "current interest rate", what interest rate are you referring to? since the bond's rate does not change.

deposit rates.

for instance, bank account rates are currently at 0.1% and 1 yr fixed deposit rates around 1%.

A bond that pays 3% may look attractive.

however, if deposit rates rise...eg. fd rates at 2%..then the bond wont look as attractive.

 

[wahkao3]

By "current interest rate", what interest rate are you referring to? since the bond's rate does not change.

"current interest rate" means right now, the market interest rate

 

[dreamyxq]

deposit rates.

for instance, bank account rates are currently at 0.1% and 1 yr fixed deposit rates around 1%.

A bond that pays 3% may look attractive.

however, if deposit rates rise...eg. fd rates at 2%..then the bond wont look as attractive.

this is exactly the answer i'm looking for. thanks!