Bond is an instrument through which an investor gives loans to a company or government that pays an investor a rate of return over a specified period of time. An investor or simply an individual buys a bond from a company or government at a definite amount and the bond issuer promises to return the amount with the rate of interest to the investor at end of the time frame.
There is an inverse relationship between Bond price and market interest rate. when the rate of interest increases then the bond price falls and vice versa. Let's take an example to understand this concept, suppose you purchase a bond for Rs 100 at 5% per annum. At the end of the year, you will get Rs105. Now suppose after 6 months(before completion of maturity) interest rate increased to 10% from 5%, you will try to sell this bond and purchase a new bond which gives you10%. But when you will go to sell the bond, no one will interest to buy the bond at 5% because they are getting 10%. So at that time, they will ask you to decrease the bond price from Rs100 through which they can compensate for the loss. So when the interest rate increases, the bond price falls.
There is an inverse relationship between Bond price and market interest rate. when the rate of interest increases then the bond price falls and vice versa. Let's take an example to understand this concept, suppose you purchase a bond for Rs 100 at 5% per annum. At the end of the year, you will get Rs105. Now suppose after 6 months(before completion of maturity) interest rate increased to 10% from 5%, you will try to sell this bond and purchase a new bond which gives you10%. But when you will go to sell the bond, no one will interest to buy the bond at 5% because they are getting 10%. So at that time, they will ask you to decrease the bond price from Rs100 through which they can compensate for the loss. So when the interest rate increases, the bond price falls.
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