Interest Rates & Bond Prices

What this unit covers

Learn why bond prices fall when interest rates rise, with a simplified worked example, one of the most commonly skipped ideas in retail investing.

By the end you will be able to

• Explain why a bond's price falls when interest rates rise, without any change in the issuer.
• Estimate a perpetual bond's price using coupon divided by prevailing rate, as a rough teaching estimate.
• Tell apart a bond's fixed coupon from its moving market price.

How it starts: A Fixed Payment, A Moving World

1. You hold a bond that pays you 60 rupees a year, forever, on 1,000.
2. Interest rates rise from 6 percent to 8 percent.
3. Its price falls to 750 rupees, though the bond itself never changed.

Words you will meet

Prevailing interest rate

The rate of return newly issued loans or deposits are offering right now.

Coupon

The fixed rupee amount a bond pays its holder each year.

Face value

The fixed rupee amount a bond is issued at and measured against.

In this module: Interest Rates & Bonds

1. What Are Bonds?
2. Government vs Corporate Bonds
3. Interest Rates & Bond Prices (this unit)
4. Yield Curve Simplified