The Relationship Between Corporate and Municipal Bond Prices, Interest Rates and Yield. South Florida FINRA Arbitration and Litigation Attorney.
The price of a bond moves in the opposite direction than market interest rates. When interest rates go up, the price of the bond goes down. When interest rates go down, the bond’s price goes up. A bond’s yield also moves inversely with the bond’s price. For example, let’s say a bond offers 3% interest, and a year later market interest rates fall to 2%. The bond will still pay 3% interest, making it more valuable than newly issued bonds paying just 2% interest. If you sell the 3% bond, you will probably find that its price is higher than a year ago. Along with the rise in price, however, the yield to maturity for any new buyer of the bond will go down. Now suppose market interest rates rise from 3% to 4%. If you sell the 3% bond, it will be competing with new bonds that offer 4% interest. The price of the 3% bond may be more likely to fall. The yield to maturity for any new buyer, however, will rise as the price falls.
It’s important to keep in mind that despite swings in trading price with a bond investment, if you hold the bond until maturity, the bond will continue to pay the stated rate of interest as well as its face value upon maturity, subject to default risk.
This post is being provided for educational purposes only. It is not designed to be complete in all material respects. Thus, it should not be relied upon as legal or investment advice. If the reader has any questions concerning the contents of this post, you should consult with a qualified professional.
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