The Hindu Business Line : Bond prices vs interest rates

Suppose a company has issued a bond with a face value of Rs 1,000 carrying an interest of 10 per cent per annum. If a few months after the issue, the interest rate on similar bonds fetch 12 per cent per annum, the bond issued by the company would have to fall to such an extent — approximately to Rs 833.33 — that the investment therein gives a yield of 12 per cent per annum. And should the interest rate come down to 8 per cent, the bond price would rise to such an extent — approximately to Rs 1,250 — that the yield therefrom approximates to 8 per cent.

There is another way of looking at this phenomenon. When the interest rate rises vis-À-vis the one offered on the bond, the bond becomes that much more unattractive to the investors and when the interest rate falls down vis-À-vis the one offered on the bond, the bond becomes that much more attractive.

S. MURLIDHARAN

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