Relationship between bond prices and interest rates


Learn more: http://www.khanacademy.org/video?v=kDRqSJIiTqU Why bond prices move inversely to changes in interest rate.

By | 2013-08-26T01:19:37+00:00 August 26th, 2013|Mortgages Home Loans Interest Rate|25 Comments

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25 Comments

  1. sg77077 August 26, 2013 at 3:40 PM - Reply

    wouldn’t the correct pricing be NPV of (100, 1100) discounted at 15%?

  2. sg77077 August 26, 2013 at 2:42 PM - Reply

    nevermind he turned it into a zero coupon bond which makes no sense. no need to oversimplify things, people will learn more when you just stay consistent and explore all important details

  3. nizki121 August 26, 2013 at 1:57 PM - Reply

    finally i get it. thanks so much for these videos!!!!

  4. Ezcape Ezmile August 26, 2013 at 1:08 PM - Reply

    If you taught at my college I would soooo take your class! Thanks a million plus a 1000% coupon!!

  5. DjJoxn August 26, 2013 at 12:52 PM - Reply

    Just Plain simple and Amazing!.

  6. tiffany Wong August 26, 2013 at 11:56 AM - Reply

    it reli helpsss!!!!!!

  7. Don Xu August 26, 2013 at 11:32 AM - Reply

    It’s P+P(0.10)+P(0.10)^2 = 1000.. he’s right. and it’s not reinvested, its cuz the interest rate is compounded

  8. Nadir Ally August 26, 2013 at 11:12 AM - Reply

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  9. lostkiwijack August 26, 2013 at 10:25 AM - Reply

    Great job.

  10. NexusCapital August 26, 2013 at 10:13 AM - Reply

    I don’t understand why when interest rates go up tho people expect more from the bond? I understand why all of the current bonds go down in value I just don’t get why people automatically expect more return?

  11. oliver mia August 26, 2013 at 10:02 AM - Reply

    where will people get the idea that the prevailing interest rate should be higher or lower? rating agencies? central banks?

  12. huppysingh August 26, 2013 at 9:17 AM - Reply

    Sal, you rock man. We should have teachers like you in all schools. Your language is simple, your voice is clear and your explanation is brilliant! Keep these videos coming.

  13. Luan Vu August 26, 2013 at 8:51 AM - Reply

    I watched two of your videos about the basics of bonds, leading me to watching your TED talk video. Thank you, Sal! Like you said, it will stay with the next generations.

  14. Stephan Kerby August 26, 2013 at 7:53 AM - Reply

    what software are you using to make these? They are great videos and my family loves them but my daughter wants that software 🙂 Any help is appreciated

  15. MS3boostin August 26, 2013 at 7:02 AM - Reply

    They don’t expect more from the bond, they just expect to pay less so that offsets the increase in interest rate. For example, you paid 1,000 for 10%, but now interest rates are at 12%. So I only want to pay you $797 because that is a fair trade — (1,000/1.12^2) — This is all an exercise in what is the fair value for a trade, when the interest rates fluctuate. If the interest rates go up, the original bond owner will have to forfeit money to make the trade.

  16. hamed elgany August 26, 2013 at 6:43 AM - Reply

    thanks
    

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  18. TheGamerArk August 26, 2013 at 6:17 AM - Reply

    but wouldn’t it make more sense for him to just keep the bond until it runs out or “matures”. That way he will still make the same money he was “promised” (with some risk but let’s just say no risk) than to sell short and loose money?

  19. TheGamerArk August 26, 2013 at 5:32 AM - Reply

    i’ve seen him use it on a tablet, un-fortunatly im not sure what he is using. Maybe google it

  20. TheGamerArk August 26, 2013 at 4:40 AM - Reply

    and the math doesn’t add up. If you buy a bond for $797 with 10% interest rate for 1 year, you will end up making $159.4. But if you buy another bond for $1000 with 12% for one year, you only make $120. I don’t understand how that is a fair trade :/

  21. Pawandeep S. Thind August 26, 2013 at 3:54 AM - Reply

    I think you got it wrong. When the interest rates go up, the price of the bond goes down because big inverters sell their bonds and move their money where they could get higher return. Law of supply and demand, where there is more supply than demand, price moves down. You may ask why they would sell when they could get a guaranteed return on bond every year.

  22. Pawandeep S. Thind August 26, 2013 at 3:44 AM - Reply

    There is another market, called secondary market where investors could sell their bonds. Many people in the secondary markets are trader, who make through capital gain, in other words by buying low and sell high or sell high and buy low. When price of the bonds goes down more than expected, traders starts selling losing bonds they were holding. It increases the supply of the bonds and lowers the demand.

  23. 123123mike August 26, 2013 at 3:20 AM - Reply

    Question: I understand the basics of the inverse relationship between interest rates and bond prices described in the vid, but why is it said that investors will ‘lose’ money if interest rates rise. I can understand if they wanted to sell their bonds before maturity, as they would have to ask less so that potential buyers would make the going rate, but if they just held the bond til maturity, then they wouldn’t lose any money; they would get their interest + the full value of the bond at matur.

  24. 123123mike August 26, 2013 at 2:39 AM - Reply

    …and why would this trigger a sell-off?

  25. Amlan Dutta August 26, 2013 at 2:15 AM - Reply

    Understanding either one , you understand the rest …let me further explain …when a company issues a 100 $ bond with 4 % interest initiallyi.e (104$ but later due to market conditions which shows growth in interest rate to 5 % , he cant increase the coupon interest to 5 % , what he does is brings the price down to 99 % so that 104 $ would now imply 5 % coupon ….

    So , people while buying the bond at lesser rates are automatically getting higher return ..so doing one implies the other .

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