What is the relationship between interest rates and bonds?
An example of an AI chatbot conversation about interest rates and their impact on bonds.
Can you explain how interest rates affect bond prices?
Sure! When interest rates rise, bond prices typically fall, and vice versa. This is because new bonds are issued at higher rates, making existing bonds with lower rates less attractive.
Why do bond prices drop when interest rates increase?
Bond prices drop because investors want a higher yield. If new bonds offer better returns, the older bonds must decrease in price to compete.
Is there a specific formula to calculate the price of a bond?
Yes, the price of a bond can be calculated using the present value formula, which discounts future cash flows (interest payments and principal) back to their present value.
What happens to bonds during a recession?
During a recession, interest rates often fall, which can lead to an increase in bond prices as existing bonds with higher rates become more valuable.
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