If interest rates increase after a bond issue, what will happen to the bond’s price and yield-to-maturity
When interest rates increase after a bond issue, there are inverse relationships between bond prices and yields-to-maturity. Here's what happens:
1. Bond Price: As interest rates rise, the price of existing bonds typically decreases. This happens because newly issued bonds will offer higher interest rates than older bonds. Consequently, buyers are less willing to pay full price for older bonds with lower yields. The decrease in bond prices is more significant for longer-term bonds or those with lower coupon rates.
2. Yield-to-Maturity (YTM): YTM refers to the total return anticipated on a bond if it is held until maturity. When interest rates increase, the yield-to-maturity of existing bonds becomes relatively less attractive compared to newly issued bonds with higher interest rates. Consequently, the YTM of existing bonds also increases. This increase in YTM reflects the higher returns investors would demand for holding on to bonds with lower interest rates compared to the prevailing market rates.
In summary, when interest rates increase after a bond issue:
- The bond price typically decreases.
- The yield-to-maturity of the bond increases.
It's also worth noting that these relationships are general principles and other factors, such as the bond's credit rating, market conditions, and investor sentiment, can influence bond prices and yields as well.