How do interest rates affect the value of bonds being traded in the bond market??
Answer When interest rates go up – bonds go down (and vice versa). If you have a bond that pays 4% and interest rates go to 5%, your bond is worth 1% less a year in income. Though it’s not that simple, a 5-year bond would fall from about 100 to 95 (cents on the Dollar) in that scenario. If interest rates instead fell to 3%, your bond would pay 1% more per year than the now-lower rate. Your 5-year bond would go from about 100 to 105. Of course, there are other factors like liquidity and ratings, but the main factor is essentially the length to maturity. Usually bonds pay more interest to invest longer term.
