Why do bond prices increase with a lower market interest rate?

Question:

Why do bond prices increase with a lower market interest rate?

Bond

Bonds are the debt instrument which are used to raise funds for long term financing. The issuer of the bond pays coupon amount to the holders of the bond and the principal is repaid at the end of bond period.

Answer and Explanation:

It can be explained through the simple preference rule. When interest rates in market fall and goes below the coupon rate of the bond then investors prefer to invest in bond as they feel that bonds are the best place to park their money because they are providing higher returns because of which the demand of bond increases leading to increase in bond price.


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Bond Order: Definition, Formula & Examples

from AP Chemistry: Help and Review

Chapter 14 / Lesson 14
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