Why selling bond suffer when interest rate get high

2006-11-12 6:58 pm
Hi, I want to know why selling bond before maturity date will suffer money loss when interest rate increase and profit when interest rate decrease? Can anyone list a simple example to me? (Can be answer in chinese... I just do not know how to type...)

回答 (1)

2006-11-13 1:03 pm
✔ 最佳答案
Yes, you may suffer in selling bond when the interest rate is high.

Instead of looking at the current market price, you have to calculate the intrinsic value* of the bond. Then compare its intrinsic value with the price that you have paid. There are five common relationships about bonds:

1. Bond prices and interest rates are inversely related. In other words, when interest rates increases, the value of bond decreases.

2. the market value of a bond will be less than the par value* if the investor's required rate is above the coupon interest rate*; but it will be valued above par value if the investor's required rate of return is below the coupon interest rate.

3. As the maturity date approaches, the market value of a bond approaches its par value.

4. Long-term bonds have greater interest rate risk than do short-term bonds.

5. The sensitivity of a bond's value to changing interest rates depends not only on the length of time to maturity, as see in the fourth relationship, but also on the pattern of cash flows provided by the bond.

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*intrinsic value: the present value of the asset's expected future cash flow

*par value: bond's face value that is returned to the bondholder at maturity

*coupon interest rate: the percentage of the par value of the bond that will be paid out annually in the form of interest
參考: My notes from textbook


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