If overall interest rates in the economy rise, a corporate bond with a fixed interest rate will generally decline in value.
What is the difference between Bond Prices Vs Yield?
Bond prices and interest rates go hand in hand. Bond prices typically decline as borrowing costs increase (when interest rates rise), and vice versa.
Consider zero-coupon bonds, which don't pay monthly interest and instead derive all of their value from the difference between the purchase price and the par value paid at maturity.
This is an easy way to understand why bond prices move in the opposite direction of interest rates.
Zero coupon bonds
Zero-coupon bonds are sold below par value and have yields that depend on the price paid, the par value, and the time until maturity.
Zero-coupon bonds, on the other hand, also lock in the bond's yield, which can appeal to some investors.
For example of Zero-coupon bonds,
The current rate of return on a zero-coupon bond with a par value of $1,000 (paid upon maturity in one year) and a market price of $950 is 5.26 percent: $1,000 - 950 950 x 100 = 5.26.
In other words, a person would have to be content with obtaining a 5.26 per cent return if they paid $950 for this bond.
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