INTEREST CHANGE IMPACT over Price Bond & Face Value
Created by
- Jose_Henrique
Created at
Variables
Actual Interest Rate: 4.75%
Description
INTEREST RATE is how much a government's bank is paying for who buy his bonds. This has been known since biblical age.
What's not trivial is how change in interest impacts the price bond and face value.
Because different from variable income (where all variables are known in initial and the final result not), in fixed income the final result (invested capital or face value) is pre-agreed and warranted.
Let's understand better by equation below:
So, as you can see now, the interest rate factor is in denominator (not in numerator multiplying the price as a typical finance equation). That means an interest increase reduces the price.
Consequently, if a bond trader or holder sells before final maturity, he can face high variations in invested capital as demonstrated in the table above.
