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Fixed Income & Investment Education 

 

 

What happens to the value of my bonds when interest rates change?


How do changing interest rates impact the value of my bonds when interest rates change? Will I make money or will I lose money on my bond when interest rates go up or down?

There is an inverse relationship between a bond's price and yield. What does that mean? When one goes up, the other goes down. On the Price-Yield Curve: when a bond's price increases the yield decreases and vice versa. Similarly, as a bond's market yield decreases, its duration increases (and vice versa).

 

Convexity of Bonds

The theoretical price of each bond is calculated over a range of interest rate offsets to the prevailing Treasury yield curve. The result of such a calculation is illustrated in the following figure. As the interest rate offset increases, the bond price decreases. The upward curvature of the line is indicative of the "convexity" of the bond. The higher the coupon rate is for a bond, the lower its convexity will be. The lower the coupon rate is for a bond, the higher its convexity will be. Therefore, Zero Coupon bonds have the highest convexity. Convexity definition What is convexity? What is duration? Duration definition

 

 

How Do Changing Interest Rates Impact the Price of a Bond?

How Changing Interest Rates Impact the Price of Bonds

 


 

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