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The Inverse Relationship between Bond Prices and Bond Interest Rates

Bonds are considered less risky forms of investments than stocks, as the former does not have the same volatility as the latter has. It represents a promise to pay when the indebted entity, the bond issuer, borrows money from a buyer of the bond, the bondholder. Bonds are used by the government and private companies to finance desired projects. The interest rate of a bond is fixed when it is first issued. The payment comprises of two parts – the fixed bond interest rate or coupon and the final amount to be paid upon maturity. The fixed coupon rate may be annually or every 6 months depending on the type of bond. Bonds can be adversely affected by prevailing economic conditions such as rising interest rates.

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