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Relationship Between Interest Rates and Bond Prices?

Bonds prices in fixed income securities have an inverse relationship to interest rates. Bond prices generally fall when the borrowing expense of money rises (specifically when bond prices and interest rates rise), and vice versa.

What Are Bonds?

Bonds are a medium to raise funds from the market through investors. The investors can be an institution or retail investor. An organization whenever needs money to fund their different projects, business operations, expansion, or for other reasons plan to raise money from the market instead of seeking loans from banks or other institutions. For the same, bonds are issued. The issuer in the form of bonds gets investment and the bondholder is promised a fixed interest that acts as a source for period income and the return of invested capital knows as face value in bonds.

For instance, an issuer issues bonds having face value Rs. 1000 for 10 years at a coupon rate of 7%. You can buy a minimum of 10-unit valuing Rs. 10,000. The bond can yield you the return that can be monthly, yearly, quarterly, or half yearly declared while issuing the bonds. Thus, bonds help an issuer fulfil the need for money and a bondholder earn fixed income relatively higher than fixed deposits in banks.

Bonds in Indian market

India is the fastest growing economy in the world and has the largest market. The business opportunities in the country are more. Bonds in Indian market are issued by government and private entities. The bonds issued can be corporate bonds, convertible bonds, government bonds, green bonds, tax free bonds, PSU bonds, perpetual bonds, covered bonds, zero coupon bonds, sovereign gold bonds, covered bonds, and more debt mutual fund.

Buy bonds in Indian market

You can gather information about the issuer, type of bond, coupon rate, maturity, and buy bonds online. You can buy bonds in Indian market through various sources dealing in bonds. It has become one of the preferred fixed income sources also for common investor today. The spreading awareness about bonds as a fixed income security has helped educate readers and take wise decisions.

People are taking advantage of bonds and fulfilling their various goals in life. It is known to provide many benefits. Credit rating is one of the essential factors that cannot be ignored and if you ignore it the risk of capital loss will increase. The rating helps investors take better decisions.

Experts not only in India but worldwide suggest not to make haste and choose the investment instrument considering credit rating along with other key essentials. Since credit rating plays

a vital role, it cannot be ignored. “Retail investors should consider investing in taxable listed bonds with AAA rating now because the return gap between safe bank FDs and AAA rated bonds is almost 2%,” says Deepak Jasani, Head of Retail Research, HDFC Securities. Our Indian bond markets

Bond prices and interest rates

Every bond comes with a fixed face value. You can buy the number of units considering your capability. The more you invest the higher the return you can expect. Make sure you consider bond prices and interest rates to accomplish your desire of earning higher yield.

Interest rates keeps a significant importance and is a deciding factor. It is the feature that make an investment avenue valuable. So, it is advised to take into consideration bond prices and interest rates prior to choosing a bond for the investment.

Who is the key issuer of bonds?

In India, the key issuer of bonds are the corporate entities and the government including state government and central government.

What to know about Bond interest rate?

Every individual and institution go for investing with the wish to earn income in the form of interest. It is key attraction that encourage all to park their surplus money for a defined period of time. The duration for investment can be chosen based on your persona lor professional need. Bond interest rate is the key essential unlike other factors that make bonds a preferred fixed income security.

What are the advantages of investing in bonds?

Bonds comes to you with a host of advantages. If you are looking to take the maximum benefit out of it, it is good to expand your knowledge, consider reviews, ratings, coupon rate, maturity, and the bond type.

Below are the key advantages of investing in bonds

  • Fixed return at different interval
  • Liquidity to encash your bond as and when required
  • Minimal risk as there is total capital protection specially in case of government bonds
  • Safe and secure instrument for investment in the country
  • Different type of bonds available to choose with different maturities

Interest rates and bond prices are inversely related. It is good to invest in a range of bonds post considering your varied financial objectives.

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