Bonds and the Bond Market in India
Bond Prices and Yields Move in Opposite Directions
When interest rates rise, existing bond prices fall, and when rates fall, prices rise, because new bonds offer different returns.
The key rule of bond investing.
Yield
The return an investor earns given the price paid.
Seesaw
If new bonds pay 8 per cent, an old 7 per cent bond becomes less attractive, so its price falls.
Duration
Longer-maturity bonds move more when rates change.
Holding to maturity
If you hold to maturity, you still get your promised payments, whatever happens to prices in between.
A rate rise
When the RBI raises rates, prices of existing bonds fall.
Assuming bond prices never change
They fluctuate.
Key takeaways
- Prices and yields move inversely.
- Rate rises lower prices.
- Longer bonds are more sensitive.
- Holding to maturity secures the promised payments.
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