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Chapter 5: 9DQ (page 524)

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? (LO16-2)

Short Answer

Expert verified

The bond prices and interest rates have an inverse relationship. When prices of bonds increase, the interest rates go down.

Step by step solution

01

Bonds

The term bond refers to a fixed-incomefinancial instrument representing the money invested by an investor in a corporation for generating interest income and the principal amount.

02

Relationship between interest rates and bond prices

The interest rates and bonds prices move precisely in the opposite directions. If interest rates go up in the market, then the prices of a bond will go down.

The long-term bonds are impacted more because of interest rate variations in the market. Short-term bonds’ maturity date is closer thanlong-term debts.

Long-term debts are more sensitive to interest rate changes because they contain a longer duration than short-term bonds.

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Most popular questions from this chapter

Tyson Iron Works is about to go public. It currently has after-tax earnings of \(4,400,000, and 4,200,000 shares are owned by the present stockholders. The new public issue will represent 500,000 new shares. The new shares will be priced to the public at \)25 per share with a 3 percent spread on the offering price. There will also be $280,000 in out-of-pocket costs to the corporation.

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