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What happens to Bond duration and Bond coupon rates when interest rates rise?

What happens to Bond duration and Bond coupon rates when interest rates rise?

What happens to Bond duration and Bond coupon rates when interest rates rise?

slkusractJust

you need to understand the concept of bond first b4 you will understand the other aspects of it. lets consider a bond with a face value of $1000 that pays $50 coupon rate per year, for 30 years. that effectively makes it a 5% bond. suppose interest rates rise to 10%. to sell the bond, i will have to lower the price, because at $1000 the bond is now still paying $50 coupon rate, giving only 5% effective interest. if i were to sell it as a bond with 10% interest, then i'll have to lower the price of my bond. this illustrates the relationship of bond prices and interest rates. when interest rates goes up, bond prices goes down, and when it goes down, prices goes up. as for the coupon rate and duration, they are fixed by the issuer right at the start.

slkusracthelper

Both the coupon rate and the term to maturiry (i.e., the duration) of a bond are independent of changes in the interest rate- they are both established at the time a bond is issued.

slkusractRayM

because a bond with a higher rate are worth more, their price goes down with the rate going up. so an old 5% mortgage is worth less than a 6% mortgage-all other things equal. Duration plays a much small role but the longer a low interest rate loan has to mature again it is worth less than a short term loan.

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