When interest rates increases bond prices goes down, and vice versa, when interest rates go down, bond prices go up – can someone explain this clearly to me please?
fixedincome
Why is there an inverse relationship with interest rates and bond prices?
byu/its_just_gail7 inAskEconomics
Posted by its_just_gail7
1 Comment
A bond represents a series of future cashflows. If you specify a discount rate for the future cashflows, then you’re finding the present value of the bond given that rate, which would be the price. It’s also possible to go the other direction- if you set the price of a bond, then for the price to be the NPV of the future cashflows, you’ll have to find a rate (called the IRR, or Internal Rate of Return) that makes the NPV of the future cashflows equal to that price.